What do revolutions and elections mean for business?

Today, it can be hard to distinguish any meaningful discussion about business from a conversation about geopolitics. The latest edition of the Yale CEO Caucus gave business leaders, government leaders, and scholars the chance to consider how developments in the Middle East and Europe, as well as the U.S.-China relationship, are likely to alter the global marketplace in years to come.

The Yale CEO Caucus is a roundtable for business leaders, political leaders, and scholars held twice a year in Washington, D.C., moderated by Jeffrey Sonnenfeld, senior associate dean for executive programs and the Lester Crown Professor in the Practice of Management at the Yale School of Management.

Middle East

The Arab Spring has left many unfinished revolutions, noted Robert Hormats, under secretary of state for economic growth, energy, and the environment. "One thing we know about revolutions, the issues that produce them do not resolve themselves quickly. After the American Revolution, it took us roughly a decade to come up with a credible constitution," Hormats said. "After the French Revolution, that country took decades to establish orderly governments. So we shouldn't be impatient. Moreover real progress has already been made in the Middle East and North Africa in key areas."

But historical precedent doesn't make the current uncertainty any more palatable. Though less than 30% of the companies represented in the room are directly engaged in the Middle East, it was the highest concern among those present. The event took place September 20, 2012, with the death of Ambassador Christopher Stevens and the protests over the amateurish anti-Islam video "Innocence of Muslims" still in the news.

Hormats argued for engagement. "This is very new territory. We cannot predict what is going to happen in the region," he said. "But the one thing we can predict is that if we back off our engagement, that will certainly lead to consequences we do not like and will not serve American interests in the region in the long term."

Deputy Secretary of Defense Ashton Carter addressed the gathering immediately after giving testimony to both houses of Congress. His comments underscored the need for ongoing engaement.

Lynn Tilton, the CEO of Patriarch Partners, said that MD Helicopters, one of her 75 companies, continues to do business in the region, often with the U.S. military as an intermediary. "These are scary times," she said. "I would be surprised if there were no war in the Middle East in the next 12 to 18 months. And I think the people living in those countries feel the same way."

Europe

Charles Kupchan, professor of international affairs at Georgetown University, said, "We are at the beginning of a long, bumpy road in the Middle East. I worry about war, too." However, he said, "I also think the ripple effects are limited. What would keep me awake at night from a business perspective is not Egypt, Syria, or even Iran, but systemic risks. At the top of my list would be that the EU goes south. I think it's headed, finally, in the right direction, but if the euro doesn't survive, I'm not sure Europe will survive."

Xiaolian Hu, deputy governor of the Peoples Bank of China, also expressed concern about how events in Europe will affect China. "Europe is the most uncertain place. We do not worry about the American economy because China's economy now faces a big challenge from the export sector. The lowest export growth is Europe, so that's why we focus there."

U.S.-China Relationship

With the presidential election in the United States and a leadership transition expected in China, there is significant short-term uncertainty adding to the longer-term shift in the global roles of the two powers.

"The U.S.-China relationship is arguably the most important in the world," said Stapleton Roy, former U.S. Ambassador to China and Indonesia. "It offers the best opportunities and it offers the biggest dangers if it is mishandled. There's a need to find a new type of relationship that can establish a stable balance—that is mutually acceptable—between competition and cooperation."

Roy offered an analogy for those that see China's leadership structure as opaque. "A way to think about China's leadership system is as a corporate system. We are used to electoral processes for producing leaders. China has a corporate system, meaning you have highly experienced officials who have risen to those positions through a highly competitive process," he said.

Noting that the leaders expected to take over the top posts in the government have spent much of their careers introducing market reforms to China, he continued his business analogy with a warning of the challenges they face. "If we equate China's growth rate with a stock price, it's a lot easier to run the place when the stock is rising. When China's growing at double-digit figures, people can put up with a lot of incompetence in China's leaders, but now China's economy is slowing down. That means the stock price is falling and it is more difficult to manage problems."

Without commenting on politics, Yunxian Chen, vice governor of Guangdong Province, discussed his province's future. Guangdong Province has a population of more than 100 million, making it more populous than any country in Western Europe, and per capita GDP is U.S. $8,000. He pointed to a shift in the area toward combining smart technology and manufactured goods. Building expertise by meeting domestic demand can pave the way to an exportable set of products and services around smart appliances and load-leveling of electricity demand, he said.

John Frisbie, president of the U.S. China Business Council, said, "The relationship is characterized by mistrust, pretty much across the board, economically, strategically, militarily, and going both directions." He doesn't see that as sustainable, "This is a relationship that is only getting bigger, more complex, and more important to us. The message to both governments, as they enter into this phase of transitions, is that we need more engagement, not less."

Systemic Concerns

Change is coming, according to Secretary Hormats. "If we look at the global economy over the next 20 years, it's going to be virtually unrecognizable from the one established at the end of World War II and probably very different from the one we have today," he said. "The structure of the rapidly evolving global economy is going to depend to a significant degree—although by no means exclusively—on what happens between the United States and China."

Expressing concern that business competition isn't happening on a level playing field, he raised the question of whether China will miscalculate about its internal practices that adversely affect foreign trade and investment, or export and overseas investment practices. "The miscalculation would be if China does not, for example, improve protection of intellectual property and trade secrets or if they continue to provide significant support for state-owned and other enterprises, giving them an artificial competitive advantage. The risk for them is that the global system that has helped China to develop, as the result of its openness, will begin to turn inward, and there will be growing incidents of economic nationalism that will work against China's desire to boost exports and execute a "going out" investment strategy for its companies, because those companies could encounter more resistance."

Kupchan also noted the potential for economic nationalism as one of the political effects of globalization. "I'm struck that we have not yet seen protectionism raise its head," he said. One reason he thinks it still might: "I think we are witnessing a structural decline in the welfare of middle class society in North America, Europe, and Japan. If we don't do something about that, there will be a backlash. That could have serious systemic effects on the global economy."

Hormats speculated that the significant growth in oil and gas production in the United States, coming largely from fracking and horizontal drilling, could alter off shoring practices. He noted, "Some companies that were going overseas to take advantage of cheaper labor will now are likely to think twice, and in some cases companies may move some production—particularly energy intensive or oil/gas throughput production—back here, because of the greater abundance and lower cost of energy."

A Complex World

David Bach, the senior associate dean for executive MBA and global programs at the Yale School of Management, said that business leaders are aware that information salient to immediate problems or long-term strategy may well come from understanding political events on the other side of the planet. "It's a complex world, where geopolitics, domestic politics, and business interact," said Bach. "The global economy is so tightly connected that the potential for ripple effects mean you can't separate countries which are markets or suppliers from the rest of the world."

The Yale CEO Caucus was sponsored by Edelman, Ernst & Young, Korn/Ferry, NYSE Euronext, Patriarch Partners, Leslie & Steven Saiontz, CNBC, and UPS.