Uncertainty is Not Going Away
8th November 2012
This week, within the space of 48 hours, the United States elected its next president and the Chinese Communist Party will convene in Beijing to begin the formal handover of power to the next generation of its leadership. To many, this pivotal transition point for the world’s two largest economies holds out the promise of deliverance from the specter that’s been haunting decision-making ever since the collapse of Lehman Brothers four years ago: the specter of “uncertainty.” If there is a phrase that CEOs, politicians and investors use more often to explain everything from poor performance to halting growth to lack of investment and a reluctance to boost hiring, it might just be its near-cousin, “volatility.”
The reality, however, is that the long-awaited, much-desired “certainty” is a mirage. Uncertainty and volatility, in economics and politics, are now as permanent to the macro landscape as competition, resource scarcity, disruptive technology and the race for talent. Leave aside the false nostalgia for a certainty of outlook that never quite was – or, rather, for a kind of uncertainty that only seemed to surprise on the upside during the years of the great moderation. Ignore as well the fact that uncertainty and volatility too often are used as synonyms for the structural challenge of the long period of deleveraging still facing major Western economies. No election in the United States, and no leadership change in China – however orderly, pro-growth, or politically decisive they may be – can reverse the structural shift towards uncertainty in the global macro environment.
It is a shift that is defined not just by a range of geopolitical tail risks as diverse as they are potentially consequential: a war between Israel and Iran over Tehran’s suspected nuclear weapons program; the deepening radicalization of nuclear-weapons-armed Pakistan at every level of its pulverized society; the rising tide of nationalism in East Asia threatening conflicts across multiple boundaries; the danger of far more paralyzing cyber-attacks on state and private sector organizations; the as-yet-to-drop second shoe of the Arab Awakening in the Gulf states (including Saudi Arabia) pivotal to global energy markets.
Nor is it merely a matter of economic uncertainty emerging from the still-unresolved question of whether the euro zone will manage to make its sovereign debt good through the unlimited financial commitment of its Central Bank, and the unwavering political commitment of its paymaster in Berlin; or whether the hollowing out of the moderate center in the U.S. political landscape will make going over the “fiscal cliff” – even at the cost of a 3-4 percent contraction in GDP – the better bet for a deeply polarized system; or how China’s prudent management of its next period of growth can be reconciled with a creeping oligarchy that threatens to render the all-important allocation of state capital irreversibly corrupted by personal elite interests.
Even if these geopolitical and geo-economic uncertainties were to be reduced or removed, two historical shifts would continue to multiply the variables affecting the macro landscape for investors and businesses. First, the proliferation of a diverse range of states and entities with sufficient economic and political power to affect the global agenda means that there is far less predictability and transparency in the international system. Second, the rise of state power in developed as well as developing countries has made the nexus of business and government the decisive one, with far greater policy event-risk in the markets as a consequence.
To say that uncertainty and volatility will be with us for the foreseeable future is not, however, to imply that paralysis is the only response. Recognizing that the oasis of certainty is a mirage should instead result in (at least) three changes in the way decision-making is executed today in both the private and public sector.
First, planning for the long term. It is now widely recognized that short-term thinking – from the obsession with quarterly results to aggressive compensation plans to risky investment strategies – was central to the failure of Wall Street. If you then consider that no amount of shrewd short-term planning can account for the uncertainties and volatilities of today’s global economy, then the imperative for long-term planning becomes overwhelming. Prudent risk-management and the need for institutional resilience both call for the kind of commitment that measures success over decades and not days.
Second, applying what might be termed “macro diligence” to management and investment decisions. In the era of the political economy, it matters greatly if policy-makers, regulators and public stakeholders – from Chile to China – can endorse a corporate agenda and make it sustainable. Today, earning and re-earning the license to operate is not just a challenge for the mining industry – it applies to all industries that today operate under far greater scrutiny. Learning to understand, anticipate and navigate changes in the political, economic, social, legal and regulatory context can reduce unnecessary uncertainty, and provide a framework for responding to changing terms and regulations in an effective manner.
Third, boldness. Leaders still haunted by the chaotic fall-out of the financial crisis need to stop managing for risk and start managing for reward. Yes, that is easier said than done. But if boldness is backed up by a long-term strategic commitments and rigorous diligence at all levels – micro and macro – then the alternative will seem not only irresolute but irresponsible in an increasingly competitive global environment.
So next time you hear a leader in business or politics wheel out the excuse of “uncertainty,” ask yourself if he or she has been wandering the desert timid for too long, and if you need to look elsewhere for leadership in turbulent times.