Risk Radar & Risk Shifts

Food insecurity & EUROPEAN WEAK EXECUTIVES& THE GLOBAL AGEING PROBLEM

2018ISSUE 12

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1 Food insecurity

In 2019, conflicts and extreme weather events such as enduring droughts will increase food insecurity in many parts of the world, pushing refugees to start moving. This food insecurity could be accelerated by disruptions in trade due to trade wars. In 2018, millions of people globally experienced food insecurity already, largely as a result of conflict and political instability or extreme weather events. Food security denotes the accessibility (including the affordability) of food for individuals. Unreliable access to food can lead to undernutrition, which can result in conditions such as childhood stunting and anemia in women of reproductive age, or – and this appears paradoxical – in overweight and obesity, as we explained earlier.First, the strong link between conflict and food insecurity is illustrated in the 2019 Emergency Watchlist by the International Watchlist Committee. This annually pub-lished watch list names the top ten countries that run the greatest risk of experiencing unprecedented humanitarian crises over the coming year. Food insecurity is a major factor in nearly all of the top ten countries. In 2018, crisis levels of food insecurity have been reported in parts of Yemen, the Democratic Republic of the Congo, South Sudan, Afghanistan, the Central African Republic, Nigeria, Ethiopia and Somalia. Severe food shortages have also been reported in Venezuela and Syria, caused by internal chaos and conflict. Over three million Venezuelans have fled their country’s soaring hyperin-flation, food and medical shortages, expected to reach 5.3 million by the end of 2019 in what has become the largest exodus in modern Latin American history. Next to conflicts and mismanagement (in the case of Venezuela), extreme weather events were a major contributor to food insecurity, depleting food stocks. The FAO Early Warning Early Action report on food security and agriculture provides a forward-look-ing analysis of major disaster risks to food security. It lists a climate-related phenom-enon among the biggest threats: El Niño. El Niño is a climate cycle in the Pacific Ocean with a global impact on weather patterns. El Niño events occur naturally every few years and stem from abnormally high ocean temperatures in the eastern Pacific. There is a 75-80% chance of a climate-warming El Niño event by February 2019. In 2016, the last El Niño event took place, and in combination with the heating caused by human-ity’s carbon emissions, 2016 became the hottest year ever recorded. El Niño disturbed rainfall and temperature patterns and threatened the food security and livelihoods of some 60 million people globally.Finally, as food insecurity rises globally, many countries will increasingly depend on open markets for their national food security. IFPRI’s 2018 Global Food Policy Report reminds us that global trade has played a crucial role in rapidly decreasing levels of undernourishment and improved nutrition and that trade wars threaten food security as they undermine food systems. The major geopolitical event in 2018 affecting agri-culture and food security was the unfolding of the trade war with China started by U.S. President Trump. Since the beginning of the trade war this year, U.S. overseas sales of agricultural products have suffered, while net farm income is already near 15-year lows

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in 2018 and it is predicted to further decrease in 2019, Trump thus provided farmers with $12 bil-lion in emergency aid. Brazilian soybean farmers are the principal beneficiary of the trade war, as China is a major soybean purchaser. Based on these outlooks and the political environment and climate change-related weather events that have already been seen this year, 2019 will bring us global risks of more food insecu-rity, food shortages, food-fueled unrest, and migration due to hunger.

RISKS MARKED ON THE RISK RADAR AS NUMBER 1: FOOD INSECURITY

RISK RADAR & RISK SHIFTS 05RISK RADAR / DECEMBER 2018

2 European weak executives

2018 was the year of unending disorder in Europe. Even its core, which used to be considered a source of political stability, was affected by it: Germany, France and Britain, the three traditional powers of Western Europe. Currently, all three countries are governed by a weakened executive power and the problems at home make the executives focus inwards instead of on the European project. Theresa May recently won a vote of confidence from Conservative MPs and, under party rules, she cannot be formally challenged again for another 12 months. However, what is more relevant is the crisis that Britain now faces. Theresa May has less than 100 days left to get the Brexit withdrawal agreement to pass her parliament. Chanc-es are slim that she will succeed and the cabinet has already decided to ramp up preparations for a no-deal Brexit amid uncertainty over the fate of May’s proposed EU exit deal. A no-deal Brexit would have grave consequences for the U.K. economy. All trade deals the U.K. currently benefits from would be disrupted, the car industry would be affected, the financial industry would be hit as financial institutions would have to establish bases in other EU countries and tariffs and transaction costs could hurt profits of British companies, as 70% of FTSE earnings come from overseas. These challenges could lead to a U.K. recession. The French leader Emmanuel Macron finds himself in the midst of the biggest politi-cal crisis of his presidency. While his 2017 election victory temporarily outshined the divisions in the country where almost 50% of people backed extremist candidates, the end of 2018 confronted Macron with a month-long revolt against his reforms: demon-strations by Yellow Vest protesters. This month, his approval rating fell to 23%. In or-der to defuse the crisis, he offered tax reductions and wage increases to the working class. These budget concessions haven’t abated the anger of the protesters and, what is more, with these concessions, Macron risks budgetary indiscipline as France is al-ready barely able to follow the EU 3% guidelines. Not only does this cloud over hopes of Macron providing decisive leadership at home, but likewise for Europe. The French-German alliance at the heart of European integration is in trouble, as Merkel is also in a position of weakness. She is stepping down as leader of her party and will not stand for reelection. She is already officially a lame duck. Thus, Europe’s longest-serving democratically elected leader is forced to decelerate her efforts on European affairs. Weakened political leadership in the U.K., France and Germany especially complicates region-wide coordination and decision-making. This will mean a weaker bloc in the wider international arena. For instance, it compromises transatlantic affairs. Unstable leadership in the three countries during a time of global challenges such as a trade war, a resurgent China, an assertive Russia, and a possible new crisis in Libya sparking

Yellow vests “act 4” Tear gas, 8 December - Photo by Olivier Ortelpa on Flickr

a wave of migration to Europe, poses a risk for Europe. The deteriorated positions of Merkel, Ma-cron and May and the fact that they are urged to look inward instead of operating in unity, point to the beginning of a fragmentation scenario. However, the theme of weak executives transcends the traditional Western leaders. In Spain, government majority is thin and popular anger is rising over issues of migration in the form of an upcoming far-right party, Vox. In Sweden, after more than three months of political deadlock following elections, no new government will be formed in 2018 anymore. Earlier this month, Bel-gian Prime Minister Charles Michel signed the Marrakesh pact, despite losing four ministers from former coalition partner the New Flemish Alliance and could be forced to hold elections in Feb-ruary if he fails to win parliament’s backing after his decision to back the deal brought down his ruling coalition. In the meantime, in Hungary, thousands took to the streets of Budapest. Prime Minister Viktor Orbán’s Fidesz government faces protests against a “slave law” allowing employ-ers to force employees to work overtime. But aside from a repeal of that law, the protesters are also demanding independent courts and free media and opposition parties are collaborating on a joint strategy to put further pressure on Orbán. Furthermore, the Czech Prime Minister Andrej Babis survived a no-confidence vote amid corruption allegations in November, but several thou-sands of protesters demanded that he step down. Finally, Italy will be Europe’s biggest problem child for the coming year in terms of financial risks. Italian Prime Minister Giuseppe Conte, who is not even the leader of his own government, has had to give in a little to avoid sanctions from Brussels and reach an agreement with the European Union to allow Italy to run a budget deficit of 2.04% next year. However, according to Valdis Dombrovskis, the EU’s most senior official deal-ing with the euro and financial systems, the deal “ is not ideal”. The agreement is rather a pause than an end to the risk of a clash between Rome and Brussels. Europe’s weak growth, especially Italy’s weak economy, is seen as the biggest risk for Europe in 2019.The next test for Europe will be the European Parliament elections in May next year. Euroscep-tic alliances might use this momentum to organize, such as the Alliance of Conservatives and Reformists in Europe that was established last month. This month, a poll revealed that one in four Europeans support populist parties, a number that has tripled over the past 20 years and a force that will challenge the established political order across the continent. Establishment par-ties have already been struggling to present a compelling case for European unity over the last years. It makes life more difficult for pro-European politicians wanting reforms and would mean a break with the four-decade rule of European social democrats.

RISKS MARKED ON THE RISK RADAR AS NUMBER 2: WEAK SOUTHERN EUROPEAN ECONOMIES, LARGE-SCALE MIGRATION

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3. The Global ageing problem

Populations in advanced economies have been ageing for a while. The competitiveness of Germany, among other European countries, is compromised by an ageing population. Japan is a well-known example of a developed country dealing with the problem. In the Risk Radar of April, we wrote about the Eastern European Slow Implosion. Most developed economies have made a demographic transition as industrialization went hand in hand with lower population growth. However, declining birth rates and an ageing population are now affecting less developed econ-omies, challenging whole regions to deal with a declining workforce, a higher old-age depen-dency ratio (ratio of people above 65 years of age per 100 people between 15 and 64 years of age) and the phase after the demographic dividend. According to the 2017 UN report on World Population Ageing, the dependency ratio has been on a rampant rise over the years. In the year 2010, this ratio was 11.7, and it is expected to reach 14.4 by 2020, and 18 by 2030.In China, the ageing problem is becoming more acute. It still has a high proportion of citizens of working age. However, the country is slowly moving out of this favorable phase. The latest official statistics reveal that both China’s birth and marriage rates have dropped significantly over a long period of time. A quarter of the population is expected to be aged over 60 by 2030.

To compare, the share of the U.S. population aged 65 or above is expected to rise from 13% in 2010 to 21% in 2050, while in China, it is expected to rise from 8% to 24%. After it officially ended its decades-long one-child policy in 2015, the Chinese started encouraging larger families. However, research suggests that three quarters of the fertility rate decline since 1970 was not formally related to the one-child policy. In turn, policies to ramp up birth rates are unlikely to be effective. Chen Youhua, a demographer from Nanjing Uni-versity, doubts whether proposals to allow couples to have as many children as they want or tax incentives would help to stop or reverse China’s declining births. As a result, China’s population will continue to age rapidly for decades, and, in turn, its economic growth will be lower too. Latin America is facing similar challenges. The region has a relatively young population, but populations in Latin American countries are aging rapidly. IMF research shows that today, Latin American women only have a third of the number of children they used to have in 1950, while the population is getting older. Thus, the demographic dividend that Latin America has been enjoying since the 1970s is coming to an end. Uruguay, Brazil, and Colombia only have a couple of years of dividend left, while the dividend is already over in Chile and Costa Rica. This new reality is challenging the fiscal sustainability of public pension and health care systems in the region.This rapidly ageing world population seriously affects many domains, from putting a serious burden on healthcare systems and pension funds, to the lack of adequate nursing homes. The idea of a “global demo-graphic time bomb” expresses the fear of future generations struggling to meet an ever-increasing number of retired workers and pension commitments. Ageing is a global problem and the pressure on the different domains and on the overall economic performance of countries will only increase as the world gets older by the day.

RISKS MARKED ON THE RISK RADAR AS NUMBER 3: CHINESE / OTHER EM’S ECONOMIC SLOWDOWN, EASTERN EUROPEAN SLOW IMPLOSION

RISK RADAR & RISK SHIFTS 07RISK RADAR /DECEMBER 2018

Photo by zzt126 on Pixabay

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INTERNAL SOURCESFiltering Hegemonic ShiftsFiltering Technological ShiftsThe MacroscopeRisk Radar

EXTERNAL SOURCESAABC NewsBarclaysBBCBloombergFAOFull FactIFPRIIMFNasdaq

PoliticoReliefwebReutersSouth China Morning PostThe GuardianThe New York TimesUnited NationsWashington PostWorld Food Programme