The economics of social unrest

Protest movements—most prominently in Latin America, the Middle East and Asia—have become a feature of the geopolitical landscape. Each protest is distinct, with different proximal causes, but there appear to be underlying patterns.

Concentrated wealth and income inequality are a key theme. Median incomes have stagnated around the world in recent decades, while the share of the top 1% of earners has grown sharply, as shown in the chart below. The rising gap between winners and losers has led to middle class discontent. At the same time, declining trust in governments has created a disconnect between the electorate and governing elites. Across the globe, technology is exacerbating the unrest – and has enabled disparate movements to learn from and coordinate with each other.

An economic-political feedback loop

The recent wave of protests has developed against a backdrop of economic expansion and strong asset returns. And to be sure, we expect a moderate uptick in global growth in 2020. But what happens in the next cyclical economic downturn? Some governments may be increasingly constrained – both economically and politically – in their ability to respond.

Monetary policy has little remaining room to provide stimulus, particularly in developed economies: Some countries are already in negative rates territory; many others are close to a lower bound – or the lowest level that rates can feasibly be set without adverse consequences for the financial system. See Dealing with the next downturn for details. Only several countries have decent policy space left – Russia and Mexico, for example.

On the fiscal side, debt levels are already very high, particularly in developed markets. In emerging markets, there is more fiscal space – in countries like Chile, for example – but there is a fine balance between maintaining fiscal responsibility and pursuing well-targeted fiscal spending to address popular demands.

These dynamics present additional risks in a context of slower growth. Governments will likely be hesitant to pursue adjustments that could stoke discontent. They may also be wary of policy proposals that could contribute to even greater inequality (as in the aftermath of the 2008-2009 global financial crisis). One area to watch: fossil fuel subsidies. As sustainability and climate concerns increase around the world, governments will face pressure to reduce subsidies. Yet higher fuel prices could spark a popular backlash, presenting a difficult decision for policy makers.

Countries face a number of political constraints, as well. For example, elections are important outlets for expressing popular opinion. Aside from the high-profile campaigns in the U.S., relatively few countries are slated to hold national elections in 2020, making it more likely that individuals take to the streets to express their views. In addition, polarization – across economic, social and political dimensions – is reaching a high point in many countries. This could lead to institutional paralysis, making governance and the management of social unrest even more difficult.

A cyclical downturn would create pressure on the political status quo in many countries. While this may serve to improve the prospects of populist or anti-establishment leaders, such leaders would also find their ability to respond severely limited. Once in power, populist leaders tend to follow an economically unsustainable playbook.

And globally, we have entered into a more competitive and uncertain world order. Cooperative international relationships, and strong multilateral institutions, were critical to managing the 2008-2009 global financial crisis. We see recession risks as contained in the near term thanks to easy financial conditions. But we do worry about global policymakers’ ability to manage the next downturn in an environment in which those global alliances and institutions are weakened or increasingly absent.

Market implications

The market implications of social unrest are mostly local, but can spill across borders: For example, contagion fears saw currencies across Latin America sell off last fall as protests developed.

We worry about fiscal deterioration should unrest continue, particularly given a high level of global debt. Redistribution policies that increase taxes on corporations—alongside a tight labor market that compels companies to increase wages and other benefits—could erode earnings, with implications for stock and corporate bond prices. Such risks underscore BlackRock’s preference for U.S. Treasuries as a source of portfolio resilience.

Catherine Kress is Advisor to the Chairman of the BlackRock Investment Institute (BII) and a contributor to the BII’s geopolitical views.

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