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The return of geopolitical risk

What happened?

Since the fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1991, the U.S. has been the undisputed global superpower. Ideologically, it seemed as if we reached the End of History (i.e. the belief that free-market capitalism and liberal democracies are the culmination in the history of man’s socio-political development) and the beginning of Pax Americana. This led to a decline of geopolitical risk premiums across the world, a period known as the Great Moderation. However, almost three decades later, the U.S. is in relative decline, with the economic balance of power shifting towards the East, and China in particular.

What does this mean?

Financial markets always play out against the background of more structural and longer-term political and cultural developments. The post-war period until 1973 was the period of the Bretton Woods system, with fixed exchange rates and capital controls, coupled with rapid nominal growth and active fiscal policy by governments in the background of a divided world by the Cold War. The problem of stagflation and the collapse of the fixed-currency system by the 1971 “Nixon shock” led to a new paradigm: that of neoliberal policies and an active role of monetary policy by central banks and the global dominance of the U.S. that pushed for globalization and democratization across the world. This system eventually led to the 2008 financial crisis. As a result, the current political (e.g. populism, globalization backlash) and socio-economic developments (e.g. ageing societies, weak productivity growth) could thus usher in a new economic paradigm, driven by the new geopolitical imperatives of the coming era of Great Power Competition.

What’s next?

As China is challenging U.S. hegemony, it will lead to a climate with heightened geopolitical risk. The trade war is just an omen of this, and is part of an upward trend in geopolitical risk since the 2010s, as measured by the Geopolitical Risk Index. Recent empirical studies show that increases in geopolitical risk are significantly correlated with stock market performance, company earnings and resource prices. As a result, the end of the “fourth hegemonic cycle” of U.S. hegemony will result in a more strategic perspective on the economy (e.g. decoupling or relocating strategic value and production chains, increasing soft and hard tariff barriers) and resources (e.g. the U.S. sanctioning the Nord Stream 2 project, countries trying to gain national autarky in strategic resources), that will require a more active stance of financial investors to pick out winners and losersof this era of Great Power Competition.

Could 2020 see the first VR killer app?

What happened?

As we enter 2020, virtual reality is still struggling to win over consumers. It is now widely expected that VR will mostly be used by businesses. It is the classic problem of adoption: as long as consumers do not buy VR headsets, developers will not produce content that consumers want. Simply put: The platform needs a “killer app”, an application that entices consumers to pay for the platform. The difference between a VR killer app and the historical killer apps of other technologies (e.g. electricity and the lamp, computers and the spreadsheet) is that at least one use of VR is already very clear: playing videogames. For this reason, it is interesting that next year will see the first full-size VR-exclusive videogame based on one of the most popular IPs with Half-Life: Alyx. Could this become VR’s killer app?

What does this mean?

What makes Half-Life: Alyx interesting is that a highly talented studio (Valve) is showing the level of commitment from which others have shied away: Half-Life is one of the most popular videogame IPs of all time and Valve has built the engine for Alyx specifically for VR. Moreover, with the announcement of Alyx, it seems that we have entered the next phase of consumer VR innovation, in which competition to produce content is heating up. A few days after Valve announced Alyx, Facebook (Oculus Rift) revealed its acquisition of Beat Studios, creator of the popular game Beat Saber.

What’s next?

Contrary to popular belief, a killer app will not necessarily boost sales for VR headsets among a wide audience. A killer app will first trigger the interest of a much larger group of (hardcore) videogame consumers. Consequently, developers and producers will want to invest much more in producing content for VR. In turn, that will boost the adoption rates of VR among a wide audience in the longer run. Indeed, Half-Life: Alyx could become the killer app that sets this process of VR adoption in motion.

On democracy in China

What happened?

The protests in Hong Kong have reignited the debate about democracy in China. In Foreign Affairs, the Hong Kong-based professor of philosophy Jiwei Ci, for example, argues that China cannot reach its next stage of development without democracy. What’s more, in his most recent public visit to Shanghai, president Xi Jinping called for efforts to explore new forms of democracy in the city. To be sure, it is highly unlikely that China will implement major democratic reforms in the coming years. However, it is important to wonder how the Chinese political system could gradually become more open and transparentlike all countries that reached high-income status (except petro-states).

What does this mean?

The topic of democracy in China is of course nothing new. Up until a few years ago, the belief that all countries would eventually become democratic was still dominant. More recently, the idea that democracy is merely a western concept, and other cultures have their own distinct political systems, has taken root. However, both perspectives disregard the possibility that all countries will experience a unique path towards a more open, liberal and transparent political system. Indeed, there are fundamental (institutional) differences between the democracies of the U.S., Europe and India. That being the case, a Chinese version of “democracy” is likely to come to fruition, but it will be shaped by Chinese traditions.

What’s next?

If Chinese politics become more open and transparent, it is likely to retain its highly centralized bureaucracy whose authority cannot be questioned directly (as to prevent the possibility of a weak unstable center of government). Instead, Beijing would increasingly encourage democracy at the local level. The well-known 2011 protests in the southern Chinese village of Wukan display the roots of this Chinese political spirit: protestors were frustrated with corrupt local officials, but carried flags in support of the Communist Party based on the belief that the party would intervene. Indeed, Xi’s visit to Shanghai highlights the Chinese path to political liberalization: Beijing will carry the responsibility to make local administrators listen to the demands of the people, possibly by holding elections.

TikTok is growing up, but where is it headed?

What happened?

ByteDance, the Chinese owner of the fastest growing social media app TikTok, is facing difficulty abroad. Tiktok is one of the few apps from China that have succeeded worldwide, with over 1 billion downloads, including 110 million users in the U.S. With the ongoing tensions between the U.S. and China over trade and technology, and more generally, the discrepancy between Western and Chinese values, severe scrutiny of Chinese operations in the U.S. was to be expected. New Jersey teenager FerozaAziz has received extensive media attention after getting banned for hiding a political statement about Uighur Muslims in a makeup video. A college student has sued the company for privacy violations and for funneling her personal data to China. And last month, the U.S. government announced it has launched a national security review to examine whether the app poses a national threat. 

What does this mean?

The common denominator in all these events are concerns over content moderation and censorship, the privacy and protection of data on the platform and foreign interference with political campaigns and elections. Although the user base will remain mostly underaged and the “lighthearted fun” of the medium is crucial to its success, the immensely popular app needs to grow up quickly if it wants to survive abroad. As a response to the accusations and concerns, the app is taking every conceivable measure to distance itself from its “Chinese label“. The company is planning to expand its local operations and hire more local content moderators. Furthermore, a company representative has stated that earning the trust of foreign users and regulators is TikTok’s top priority and has repeatedly made clear the company doesn’t transfer data back to China. Last, Ferora Aziz has received a public formal apology, which included the video being reinstated (allegedly, the ban was due to a human moderation error). 

What’s next?

These measures and the tone of voice are a first sign that the company is willing to adapt to foreign markets and Western standards. If they choose to follow this strategic path, this will mirror Western companies historically putting aside political or moral issues when entering the Chinese market. On the other hand, as we have written before, it remains difficult to believe the Chinese government will not heavily moderate and censor content if it opposes Chinese values or government policies. Furthermore, in line with China’s ambition as a global economic and political power, a cultural app such as TikTok could be an important vector of ideology and strong instrument in terms of soft power (e.g. to stimulate the acceptance of Chinese values, such as the different perspectives on freedom of speech or privacy). Currently, Byte Dance seems to be playing both sides of the fence, but this strategy seems untenable in the long term (for example, this study reveals how TikTok has repeatedlyclaimed to embrace an open, diverse and tolerant culture, but the actions of content moderators show the exact opposite).