Investing in the death of democracy

I remember vividly the shock I felt when I first lost a grandparent. A reliable part of my world was suddenly taken from me, never to return – and it took me a long time to readjust. Today, investors need to prepare for the same sense of grief and dislocation.

Democracy is dying – and this could take down globalisation, too

The trend is very clear from the data. The world is becoming a more authoritarian, more repressive place. This isn’t just about Donald Trump and Brexit. It’s a steady, worldwide slide towards an era of strongman leaders. From China and Russia, to Turkey and Hungary, a significant fraction of the world’s population is losing freedoms, and coming under the heel of increasingly oppressive governments.

The rise of dictatorships has a precedent

A tsunami of repression and dictatorship following a severe financial shock is nothing new. Indeed, it’s got sound biology behind it: as resources become scarcer, we all tend to become risk-averse, tightening our allegiances to kin. After the Wall Street Crash, in 1929, it took only a decade for the world to start an unstoppable slide into dictatorship, war and genocide. By 1941, there were only 11 functioning democracies left in the world. This era of global conflict had a devastating effect on the economy – with global trade shrinking more than fivefold between 1910 and 1945, as a proportion of GDP. If repeated, what would that do to your portfolio?

Today, there are many reasons to believe that this anti-democratic trend will continue

Again, where once democracies stood, we’re seeing a steady march into a period of autocratic dictators – allowed, or welcomed, by populations seemingly tolerant of nascent oppression. Now, even the sober Barclays is warning of the economic consequences of a looming period of deglobalisation.

This is about economics…

The elephant in the room is the change in the world’s economy, brought about by globalisation and the financial crisis. In the post-WWII era, it was the Pax Americana (American Peace) that won out. The Americans weren’t shy of backing a few dictators over troublesome populists – but they were effective at keeping allied countries stable. Rarely have lands with McDonalds been to war – an effect known as Thomas Friedman’s Golden Arches Theory. Consequently, backing the democratic-capitalist system of the winners used to be a winning strategy. Now the world has changed – and the new winners are certainly not liberal, Western-style democracies.

The axis of world power is now shifting, geographically. For many years, the world’s principal corridors of power have been in affluent developed countries with a long history of government stability. Now, emerging market economies continue to grow – bolstering their often-repressive regimes. China is the defining force in the 21st century, not the US. Notwithstanding China’s so-called slowdown (in fact, merely a reduction in acceleration – despite what innumerate journalists may say) its economy is steadily coming to dominate the world. Simultaneously, we’re seeing the most controlling Chinese leadership since Mao Zedong’s 20th century atrocities.

… and it’s also about demographics

Meanwhile, the demographic centre of the world is also shifting. An endless population explosion in the Middle East and Africa is filling the region to bursting, and beyond. The resulting tide of emigration threatens to undermine the stability of recipient states. From the Netherlands to Austria and Germany, we’ve seen a rising tide of right-wing, anti-migration politics in response – despite the long democratic traditions in these countries. Further east, the youthful democracies of the old Eastern bloc have not merely been challenged by this nationalist tide, but overwhelmed by it – as we can see from the Visegrád countries’ increasingly autocratic approach, in the face of mass migration to their Western neighbours.

On a background of increasing economic irrelevance, these First World states are simultaneously facing a demographic implosion of their established populations, caused by anaemic birth rates. Not without coincidence, the most economically feeble of these countries (eg, Greece) have seen perhaps the sharpest edge of the emerging fascist trend – as embodied in the terrifying Golden Dawn movement, which makes Germany’s Alternative für Deutschland party look like a kitten.

To understand the current threat to European democracies better, it’s vital to recognise the value of civic society, and the socially open culture that supports it. Institutions as diverse as churches and Sunday league football teams keep peoples together, in times of crisis. In countries such as Libya and Iraq, a lack of this peaceful and unifying civic tradition has played its part in the failure of recent attempts to move societies rapidly and peacefully to democracy. (Exponential Investor has previously explored the surprising biological origins of different cultures.)

The destabilising force of a lack of social unity is now being established closer to home. Formerly united Western democratic countries are now increasingly fractured societies – cleaved socially and culturally by a new expansion of poorly integrated immigrant populations. Where integration of new arrivals is most noticeably stalling, this mass migration has typically come from countries which are far less free, and which thus lack the long experience of civic and democratic participation familiar in the West. For example: France’s struggle to assimilate the migrants from its former colonies is a great example of the steadily worsening challenges ahead. France’s old and new populations are looking increasingly irreconcilable, with so-called “no go” zones forming in suburbs of major cities. Professor Christian de Moline has even suggested the creation of an entirely separate legal and social system, for migrant-dominated areas – essentially a two-state solution.

We’ve seen similar political trends in the UK. From nascent political ghettos like Tower Hamlets, to the anti-immigration backlash of Brexit and Britain First, we are seeing a new culture of “them and us” – with rising hostility an isolationism on both sides. That’s not conducive to sustaining cohesive, democratic societies – particularly in the face of an economic shock, or a huge demographic shift caused by burgeoning minority populations.

A world of autocrats and despots

Looking beyond Europe’s problems, let’s take a quick tour of the despots, dictators and crazies running the world today. Vladimir Putin is Russia’s indisputable strongman leader, and all pretence of democracy has long ago been lost amid ballot-stuffing, political detention and murder. Recep Tayyip Erdoğan’s Turkey has lost all hope of entering the EU, probably for decades; meanwhile, it openly attacks the West’s Kurdish allies – despite being a member of NATO. In Hungary, Viktor Orbán is setting his stall out as the leader of an emergent ethnostate. Similarly, Poland has lost much of its young, educated elite to emigration – and the remaining disgruntled rump has slid into a conservative authoritarianism that looks like a Daily Mail dream made flesh. Meanwhile, Trump needs no discussion; you’ve heard it all before.

This trend is not all down to right-wingers, however – the left is certainly no slouch, when it comes to jumping on the new authoritarian wave. Of course, dictatorship is more economically damaging when leftists do it – as can clearly be seen by Nicolas Maduro’s Venezuela, which is already racked with semi-starvation. Elsewhere in the developing world, the Philippines’ Rodrigo Duterte is a self-confessed killer, who has presided over a wave of extra-judicial executions that would make even Augusto Pinochet blush. Finally, Narendra Modi in India and Xi Jinping in China are now moving nearly two billion people into a harsher, more controlling form of government than either country has seen for more than a generation. That’s a long list – but expansion is necessary, to show how broad a trend this is.

But the UK is safe, right?

Come back tomorrow – and we’ll evaluate whether that’s correct. Meanwhile, please let us know your views with a comment below.

Best,

Andrew Lockley
Exponential Investor

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