Geo-economics: The Force Shaping Asia’s Business and Government Strategies

Geo-economics is a powerful and disruptive force shaping today’s turbulent economic and market conditions. This term describes states displacing firms as the main decision maker in a widening range of product markets. Governments do this through actions such as sanctions, subsidies and export controls in various areas, from medical supplies to energy, from semiconductors to agriculture. States intervene in economic relations to further their political goals and seek advantages for their economies and enterprises. 

This is the new global reality facing Asian businesses and governments. As the Russia-Ukraine war and related sanctions unfold on the heels of the devastating Covid-19 pandemic, in the words of the World Bank’s Global Economic Prospects report, published in January 2023, the global economy may be facing “a lost decade in the making”. With declining prospects for growth, global uncertainty and risks are surging. Much of this uncertainty is the result of geo-economics.

A relatively stable past

Having a turbulent global economy is a sharp departure from the experience of recent decades. For approximately 40 years, roughly from 1980 to 2019, the global economic and business environment was relatively calm and predictable, although by no means without sudden blips and some major bumps – the global financial crisis (GFC) of 2008-9 pushed many economies into recession, from which some took time to rebound. 

Since 2008, globalization as measured by the ratio of exports to global GDP has been trending slowing down or even unraveling, as has the growth of foreign direct investment. Yet, firms competing internationally – including Asian enterprises participating indirectly as domestic suppliers in cross-border supply chains – could still pursue relatively stable strategies. They could access funds on mostly open global capital markets, anchored by the US dollar in its relatively secure role as the world’s dominant currency. They also could focus on efficiency as the primary organizing principle for supply chains, serving a growing pool of customers in generally open international markets.

In this world, it was sufficient for Asian enterprises to understand just a few key factors shaping the global economic and business environment, including monetary and fiscal policies and exchange rate movements. Business leaders also needed a grasp of strategy-relevant institutional arrangements for the flow of goods and capital to specific regions, such as the US-Mexico-Canada Agreement (successor to the North America Free Trade Agreement, known as NAFTA) and the policies of the European Union (EU). In addition, firms had to be able to assess political risk in their particular product markets.

The new turbulent global reality 

Today, economic upheavals are diverse, extensive, global and unpredictable in their nature, scope and impact. Crisis piles on crisis. Consider how the Covid-19 pandemic and the policy responses designed to contain it overlapped with the ongoing US-China trade war, the Russia-Ukraine war and the related battle of sanctions – all amid the lingering effects of the global financial crisis. The cumulative impact of these “once-in-a-generation crises” in quick succession, along with the looming monumental challenge posed by climate change, are fundamentally altering the global environment for business strategy and public policy. 

We are living in the sort of perpetual “turbulent environment”, as described by Australian psychologist Frederick Emery and British scientist and organizational development expert Eric Trist in their classic 1965 article. The situation is characterized by instability and complexity caused by rapid, interconnected and far-reaching changes in diverse areas. As a result, enterprises and governments face increasing uncertainty and risk. 

Corporate strategy is fundamentally about leadership. It is essential during periods of transition and most challenging when past certainties are in question. In times like these, corporate strategy plays an especially important but difficult role, as business leaders, as well as public policy makers, evaluate differing and often inconsistent interpretations of possible futures for their enterprises and economies. 

Consider the following developments that affect the strategies and operations of Asian enterprises today:

Geopolitical factors  More and more, geopolitics is shaping the global economy. Examples include both the “hot” war between Russia and Ukraine and the “cold” rivalry between the US and China. Economic sanctions and subsidies in various forms have become key elements of the foreign policy of many nations including the US, the dominant economy in the world. Decision makers must ask the following questions: What impact will the Russia-Ukraine war have on commodity prices, risk premiums and the economic prospects of markets around the world? How will the intensifying US-China rivalry affect key supply chains and related market access?

Supply chains  Disruptions are occurring across many important supply chains, including those for semiconductors, energy and food. These disturbances are forcing businesses to change their organizational structures and even reorganize their geographic presence. Resilience is the byword, eclipsing efficiency as a guiding primary objective. The International Monetary Fund (IMF) has stressed that market fragmentation and uncertainty of access could soon become the norms. 

Monetary and fiscal policy  Surging prices have forced governments to raise interest rates to curb inflation and safeguard financial stability. These changes are happening against the backdrop of historically high private and public debt. Will central banks continue to tighten monetary conditions aggressively, possibly tipping economies into a recession? Or will they ease up, perhaps risking further price increases now and harsher restrictions in the future? If countries take fiscal measures designed to shield firms and households from higher costs – for example, subsidizing electricity and food – will those measures work at cross purposes with actions that tighten monetary policy? Or, due to mounting shortages and rising prices, will fiscal policy tighten further, possibly leading to slower growth and political backlash?

For Asia, moves by the US Federal Reserve are particularly important. Continuing aggressive interest rate increases in the face of persistent inflation raise concerns of capital outflows from the region’s emerging economies, which may be accompanied by currency depreciations. This could lead to financial volatility and increases in the debt burden of governments and enterprises to the extent that their borrowing is denominated in US dollars, the dominant global currency.

Financial markets  Rising interest rates mark the end of low-cost debt and an increase in the cost of borrowing for firms and households. Regional bonds have experienced escalating yields due to changing risk premiums and uncertain future cash flows of financial assets. These factors have led to financial volatility reflected in widening credit default swap spreads, declining and unstable equity markets, fluctuating currencies, and growing uncertainty with respect to the soundness of banking systems, particularly in the US and Europe (considering the recent failures of Silicon Valley Bank, Credit Suisse and others). How should enterprises plan, structure and finance their investments in this uncertain climate? How will the heads of households adjust their borrowing and spending? Will emerging threats to banking systems in the US and Europe spill over into Asia, reminiscent of the contagion during the Asian financial crisis?

Asian managers might feel like they are dealing with a cluster of interconnected earthquakes that are continually transforming the context for strategy and operations. As governments get involved in a widening range of product markets, today’s world is characterized more and more by the weaponization of both global finance and global supply chains. What does all this mean for a rules-based global economic order and the place of Asian economies and enterprises in it?

Few CEOs and policy makers have the experience or possess a playbook for navigating such a chaotic environment. The usual methods of risk management – for example, assessing political risk in a particular country or geographic region – are no longer sufficient. These approaches do not allow managers and policy makers to identify, let alone manage, uncertainties and risks that are interconnected, cross-border and global in nature. 

Expanding the toolkit for navigating a turbulent world

Tools supporting strategic decision making in times of turbulence must combine analytics with creativity. The challenge is to identify sources of uncertainty and their potential implications for enterprises. Constructing composite scenarios allows the testing of the resilience of alternative strategies. Typically, this has involved postulating baseline, optimistic and pessimistic scenarios. 

Events can be interpreted very differently, depending on assumptions made. Consider the following: How effectively and how quickly will businesses resolve observed bottlenecks in key supply chains such as semiconductors? How will this be shaped by geoeconomics – for example, the US-China rivalry? How will observed increases in the price of energy and food affect the response of central banks, and inflation expectations? What will be the adjustment in exchange rates, capital flows, financial asset prices, and public and private debt in response to higher interest rates? How will the war in Ukraine and related sanctions affect the flows of goods, services and finance in global markets? In Europe? In Asia? 

A scenario combines expectations about such a disparate range of factors into an integrated picture of alternative futures. An optimistic scenario would be based on assumptions that such factors, taken together, evolve in a favorable way toward a strengthening global economy. In a pessimistic scenario, assumptions about the set of such factors would lead to expectations of further disruptions and constraints, intensifying pressures on enterprises. 

In a turbulent world, it is essential to go beyond composite scenarios and make explicit the specific underlying assumptions about particular events and issues, as well as potential strategic options. An example would be to specify clearly the expectations with respect to the response of central banks to actual increases in inflation. This way critical assumptions can be assessed, monitored over time and adjusted as needed, based on new information. 

Beyond the stable state

Unlike the relatively stable world of the recent past, today’s global economy is marked by upheavals that are extensive, interconnected and unpredictable – a constant state of flux described by American philosopher and urban planning professor Donald Schön in his 1973 book Beyond the Stable State. International conflicts, volatile prices, unstable supply chains, and geopolitical considerations have caused governments to intervene in ways that are shaping markets. This is creating extensive uncertainty for Asian enterprises and governments. Decision makers must adjust their underlying world views and expand their toolkits for interpreting and navigating a turbulent world.