What if growth fails to guarantee stability?

“Vox Populi risk” refers to shifting and more volatile public opinion that poses ongoing, fast-moving risks to the business and investment environment. A shift may now be occurring whereby aggregate economic growth no longer guarantees political stability; fuelled by widening inequality, perceptions of elite corruption and middle-class anxieties about globalization, could Vox Populi risk become a more permanent feature of the global business and political environment? And what should be done about it?

It seems like political risk is in the headlines every day: popular protests, demands for independence, military coups, civil conflict. Citi’s Political Analysis team has documented a dramatic increase in the number of elections, mass protests and government collapses in major markets over the past three years − up 54% on the previous decade, from an average of 14.1 to 21.7 − as well as a proliferation of new, fringe and anti-establishment political parties.

In contrast to previous waves of political risk – which were often concentrated in less developed, lower-income countries and which subsided with the return of economic growth – Vox Populi risk is manifesting itself in middle-income emerging market and industrialized countries which are deeply integrated into the global economy and financial system and where growth is recovering after the recent crisis. Vox Populi risk is therefore becoming less localized and more potentially systemic.

In our view, the new Vox Populi risk is being fuelled by growing perceptions of income inequality and anxiety about globalization, particularly among middle classes. In developed markets, this has resulted largely in increased appetite for alternative political parties, which have seen an unprecedented spike in support from 2011-2014. This has sapped political capital from governments, prompted fragile multi-party governing coalitions and often surprised markets by producing unexpected election outcomes.

Mass protests have also swept through middle-income emerging market countries – despite their governments having delivered sustained growth and improved living standards. There is a greater prevalence of street demonstrations, rebellions and sustained tensions that elections fail to resolve. In some cases, such as Ukraine in 2013, local protests can rapidly spiral into geopolitical risk.

Around the world, grassroots pressures are increasing the risk of fragmentation – social, political and even geographical – as anti-government, anti-establishment sentiment reaches all-time highs and trust in institutions plummets. The Occupy movement’s framing of the 99% versus the 1%, pitting elites against the overwhelming majority, has resonated with middle classes across both developed and emerging markets.

It increasingly seems that aggregate economic growth will no longer guarantee political stability. In developed markets, there is a sense that the social contract – support of the incumbent party in return for rising living standards – has been broken. The global financial and economic crisis has rolled back middle-class living standards, for the first time in decades in some countries. In 2013, Pew reported a majority of people believing their children will be worse off financially than they are themselves, even in countries where growth had returned.i In many instances, such as the United States, this represented a historical change in trend. In France, this majority was as high as 90%; in Japan, 78%.

In middle-income emerging markets, public expectations are growing and perceptions of elite corruption have frequently been the catalyst for mass protests. Time and again, evidence of elite misbehaviour has galvanized public dissatisfaction across income groups and regions, accelerated by the growing penetration of social media – yet the resulting protests have not necessarily improved the situation, either resulting in tensions remaining high without a change in leadership, or the election of a weaker leader with less political capital.

Economically, Vox Populi risk threatens to fuel uncertainty, leading households to save more and making businesses nervous about investing. In other words, it will reduce two major components of domestic aggregate demand. Chief executive officers consistently cite uncertainty as a factor that weighs heavily on their capital spending decisions. Vox Populi risk may therefore dissuade companies from hiring and expanding, thereby holding back economic recovery – which in turn will reduce the scope for governments to respond to popular discontent.

The danger, then, is of a vicious circle, with weak elected leaders facing legislative gridlock and constrained by austerity budgets, pursuing short-termist and populist policy-making because instability gives them no mandate to undertake necessary structural reforms.

Can we think of creative political solutions to break out of this vicious circle? How can we create expectations of stability and future prosperity, which may themselves become self-fulfilling?

While voter participation rates are steadily declining, especially among the young, the rise in Vox Populi risk clearly indicates a strong public demand for political alternatives. That means there is an opportunity in Vox Populi risk, if we can find ways to engage especially the young productively in the political process. Vox Populi risk also suggests that successful efforts to tackle corruption and income inequality could have benefits that are widespread and profound. While we see Vox Populi risk as systemic and likely to be with us for some time, it does not have to be.