Wanting Bread and Peace

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Pandemic, adventurism (theirs, not ours), policy mismanagement and geopolitical fumbling (perhaps ours) have meant ramifying and cascading consequences. For everyone, strong country institutions are the de facto inoculation against such instability. Many countries, sadly many in the EM space, are not exhibiting the institutional depth needed to neutralize knock-on geopolitical effects. Lenders and investors in financial and real assets should take steps to mitigate risk exposure in the less liquid, more straitened, less substantial emerging market environments.

No shortage of bad news these days. For the 401K crowd, the S&P 500 has gotten off to its worst year-to-date performance since 1970, or in other words in the last fifty-two years. In matters of civic and geopolitical stability, and what concerns life and death, I recently came across two articles that capture aspects of our present environment.

The first was from a recent issue of the Economist magazine. This brief article, dated 6/10/22, is entitled “Climate Graphic of the Week: War and Climate put 49 million People at Risk of Famine”.

The magazine’s editorial team highlight the piling-on effect from the Russian invasion on Ukraine and global food insecurity, noting the impact of compromised food production from Ukraine and Russia’s pariah status. Both countries roughly account for “30% of the global wheat trade”.

Adding to the geopolitical stressors, the effects since 2020 of a “twin seasonal occurrence” of La Nina – a weather phenomenon that brings up cool water from deep levels in the Pacific and changes precipitation patterns – are adversely affecting agricultural cultivation. Australia has been cooler, and conditions in Africa have been drier. The Economist reports that food insecurity will worsen in 20 recognized global “hunger hotspots”.  The war in Ukraine throws the geopolitical wrench, in addition to the weather one, impairing the global distribution of food.

The second article is an IMF blog item posted on May 22nd, “Social Unrest is Rising, Adding Risks to the Global Economy”. The editorial cites the Fund’s own Social Unrest Index, which has been registering at higher (i.e. more negatively) levels.

The index covers a 130-country survey and measures – or rather counts – the use in media coverage of words associated with unrest. Prior to the pandemic, things weren’t exactly rosy, with the index showing a 5% score, meaning five percent of the country survey evoked significant media coverage of unrest. Pre-pandemic, more unrest had been noted in Latin America, starting first in Chile and then growing more pervasive throughout the continent by the fall of 2019. By 2019, unrest and civil disturbances had also been growing in the Middle East, “notably in Algeria, Iran, Iraq and Lebanon”.

The pandemic – and attendant isolation measures – placed a damper on street and civil unrest in much of the world, with the social unrest indicator posting a general decline. As the Covid restrictions began to ease, the index started to heat up again. Inflation and growing food insecurity stoked it further. Thought at not at 5, the Social Unrest Index now stands at 3%. This rising trend looks set to continue, the IMF notes:

“First, as governments relax restrictions and public concerns about catching COVID in crowds diminish, pandemic disincentives for protest may decrease. And second, public frustration with rising food and fuel prices may increase…” (italics added)

Perhaps the tensile strength in a critical component – a critical condition – for geopolitical stability, effective deterrence, had degraded, ushering in this new bout of instability. Perhaps events such as the US administration’s unthinking “Afghanistan skedaddle” last August had enervated deterrence, had emboldened some. In any event, Russian adventurism was not deterred. The Russian invasion and the ensuing consequences place us here now in this environment, with a rekindled Social Unrest Index and what that shows.

For the lender and investor, managing exposures and position taking becomes that much harder in this newer global environment, with its fresh problems like food insecurity and more animated unrest. Risk-takers must look at the new situation and break it down.

Volatility in geopolitics exerts stress on any country, especially those experiencing external aggression, but also countries experiencing economic, trade and natural resource dislocation because of that resulting instability.

That is why strong robust country institutions – the laws and established practices country residents observe in their legal, commercial, political and civil activities – offer the only real stabilizers a country can fall back on. Strong institutions influence policy and channel energy that can address national challenges and problems.

When residents have confidence in country institutions, that signals robust and responsive ones, highlighting a greater likelihood for a country to weather potentially destabilizing geopolitical episodes. One source to reference on country institutions is the World Bank’s World Governance Indicators or WGI (see http://info.worldbank.org/governance/WGI/), a good due-diligence resource.

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