Elemental Convergence
Income Inequality, Inflation and Social Unrest
Posted: September 2010
Executive Summary
”Elemental Convergence: the coming together of forces so basic, routine and ordinary to be considered unimportant or inconsequential resulting in unforeseen impacts of disproportionate magnitude.”
-Unicorn Management Services, Inc. 2007 Report on US Economic Trends
Corporate assessment of national risk conventionally includes currency, political, country, and business risks but seldom values the significant risk of widespread, multi-dimensional unrest appropriately. This type of unrest, by definition, is highly improbable and rarely seen in the world but carries with it exceptionally high costs in business disruption, dislocation and potentially complete destruction of the existing economic world order. A “black swan” event of this nature deserves much greater credence in evaluating pursuit of opportunity in emerging market countries as well as serious consideration of related outsized consequences.
Among the common characteristics of emerging market countries worldwide are a growing prosperity among the economic elite with a growing middle class mirrored by a massive underclass bypassed by the emergence. Cycles of money inflows, strong foreign reserve positions and attendant inflationary pressures are also regular features of emerging market economies coupled with generally weak capital market controls and an absence of proven methodologies for mitigating monetary extremes capable of contributing to social instability.
These converging elements suggest that Western corporations are chasing an illusion of stability when investing broadly in emerging market countries. Conditioned largely by experience in Western nations, where political stability is the norm and social conditions do not feature tumultuous upheaval, corporate leaders who drank the Kool-Aid of emerging markets are overlooking exceptional levels of risk when deploying capital and resources in those regions, risk that extends beyond their own corporate world into a wider political, military and economic one. While success when measured in profit or cost reduction exercises may prevail for extended periods, underlying fundamentals are present in major emerging market countries that will, with certainty and predictability, upset those investments, combine to disrupt or fully disable operations and put in danger global geopolitical systems.
The convergence of inflation and income inequality leads to the inevitable conclusion that one or many emerging market countries are missing only an igniter to start a conflagration unlike any seen in our era.
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