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‘The emerging markets have emerged, even as the developed markets have submerged. Politics have become more important for many advanced countries, too,’ says American economist Nouriel Roubini. (Fred Lum/The Globe and Mail)
‘The emerging markets have emerged, even as the developed markets have submerged. Politics have become more important for many advanced countries, too,’ says American economist Nouriel Roubini. (Fred Lum/The Globe and Mail)

economy

To understand new economy, ‘You need to talk to political scientists’ Add to ...

Prepare for the revenge of politics. For the past few decades, the so-called quants – mathematicians, physicists and technologists – and their younger brothers, the economists, have been in the ascendant. With their mathematical models and their ability to crunch vast quantities of data, they have shaped the way businesses understand the world, and operate within it.

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But politics is making a comeback. That was one of the persistent themes at an international conference about systemic risk in the financial services convened by the Global Risk Institute in Toronto this week (I was the rapporteur). As one of the bankers put it, if you want to understand the world economic outlook for 2013, and where your company should invest, you can’t just talk to economists any more: “You need to talk to political scientists.”

I tested that idea with two thinkers who make their living helping businesses understand the world. Perhaps not surprisingly, political scientist Ian Bremmer, founder of the Eurasia Group, instantly agreed.

“When I started the firm in 1998, I had to convince people about the importance of political science, and I was not always successful,” said Mr. Bremmer, who now has 150 employees and 400 clients around the world.

That trend is growing, he believes, and a major driver is the rise of the emerging markets, which he defines as “countries where politics matters at least as much as economic outcomes.” He notes that over the past five years, emerging markets have been responsible for two-thirds of global growth.

Mr. Bremmer has been betting since 1998 that businesses should care about politics. Economist Nouriel Roubini has no such professional stake in the issue. He shot to fame as “Dr. Doom” when his bleak predictions about the world economy came horribly true with the financial crisis, and his eponymous firm now boasts some 1,100 global clients.

He agrees with Mr. Bremmer’s thesis, and takes it one step further: “The emerging markets have emerged, even as the developed markets have submerged. Politics have become more important for many advanced countries, too.”

Drawing on the thinking of the conference delegates, and my conversations with Messrs. Bremmer and Roubini, here are seven reasons that politics will matter as much as economic projections in the coming year for anyone running a business:

Europe

This is the prime example of how developed markets are “submerging,” or reverting to an emerging-markets-style world in which politics drives almost everything.

China

The world’s dominant emerging market (and maybe before too long its dominant economy) is a communist state in which politics explicitly steers all business and economic decisions.

The U.S.

In Toronto, there was a lot of discussion of the so-called “fiscal cliff” and how it has politicized the U.S. economic outlook.

Global power balance

As Mr. Bremmer put it, “Geopolitics are suddenly in play in a way that for the last half-century they haven’t been.” We are moving from the brief, post-Cold War Pax Americana to a new age of Metternich, and the economic implications are vast, quick-changing and difficult to figure out.

Old economic tools don’t work any more

 One of the American speakers in Toronto argued that the global economy operates in 60-year cycles, and that we are entering a new one, which is why the old rules no longer apply. Mr. Roubini also believes the familiar macroeconomic toolkit no longer works. We need to create one, an inevitably political process.

Return of the regulators

A dominant theme in Toronto was that financial regulation is back. That is true – although perhaps both less than the bankers fear and than liberals would like – and it is another reason politics matters.

Inequality

Income disparity is increasing around the world and is being talked about from China to Europe to the United States. But both Messrs. Bremmer and Roubini question how real the political response will be – and hence how much true economic impact it will have.

Now is a tough time to be a political scientist. Academia is suffering from the same fiscal squeeze plaguing all public institutions, and students of the humanities are being hardest hit as education wakes up to the triumph of the quants that business figured out long ago. Meanwhile, business is rediscovering politics – so don’t drop out of that doctoral program in political science just yet.

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