Little fires everywhere: How polarization is shaping the economy

Today, Allianz unveiled the 4th edition of its “Social Resilience Index”, which identifies underlying strengths, weaknesses and perceptions of a country’s political, institutional and social frameworks.

In 2024, the Social Resilience Index (SRI) shows that an improving economic outlook, the absence of systemically disruptive events and lower inflation are contributing to a more resilient social backdrop globally. Yet, the increased frequency of protests and riots in 2024 shows how civil societies are reacting to distinct pressures, and how governments are able to cope with economic trends which erode the social contract. The Middle East saw the most substantial increase (+40.3%), followed by Africa (+19%), where it could still be attributed to the cost of living challenges in several countries, such as Kenya, South Africa and Ethiopia. Asia saw a modest rise of +4.1%, reflecting persistent social and economic issues in countries like India and Indonesia. The US, Canada and Europe experienced a slight increase of +3-4% reflecting ongoing social and political divisions, migration issues and economic uncertainties. In contrast, Latin America witnessed a decrease of -25.7%, due to the relative slowdown in inflation, improved political consensus and increased security efforts. 

In 2025, resilience may not be enough to protect from social instability, particularly in countries where political events are more frequent. Based on the frequency of protests and riots, as well as key social risk indicators, we identified four clusters of countries: those that are showing signs of normalization (Argentina, Bolivia, Brazil, Chile and Peru); high-income nations with underlying social issues (e.g. France, Germany, Italy, Spain and the US); emerging economies with fragmented societies (e.g. India, Türkiye, Mexico) and severely strained nations (Nigeria, Syria, Venezuela). 

The 2024 super electoral year has revealed fragilities in many countries: all incumbent parties in developed countries lost vote share (a first since WWII), and the ideological center of gravity has shifted to the right in 16 European countries and the United States. By the end of 2024, elections will have taken place in more than 70 countries - where almost half of the world's population lives - making the rising trend of polarization a cause for concern. The strength of democratic institutions, social cohesion and trust in functioning markets and economies are being affected by increased partisanship” said Ludovic Subran, Chief Economist at Allianz. The largest shifts towards the ideological right were observed in the last two EU elections in 16 EU countries, including Portugal, Italy, Romania, Bulgaria, Czechia and Spain. 

Polarization has increased in many countries and comes with a sizable economic cost. Political affiliation plays an important role in consumer behavior as observed in past events of heightened political uncertainty across democracies. A -10% and -20% one-period consumer confidence shock would decrease consumption in the US by USD105bn (USD304 per capita) and USD215bn (USD622 per capita) over the next four years. In Europe, the same shocks would decrease consumption by USD52bn (USD147 per capita) and USD103bn (USD296 per capita), the effect being more subdued as consumer confidence in the EU still has not fully bounced back from the effects of the pandemic and geopolitical tensions.

The long shadow of inflation, highly debated fiscal adjustment measures, and lingering productivity growth require policy makers to bridge further the widening trust deficit, actively reduce polarization risks, and tap into the power of unity. Research has found that between 1900 and 2020 there were 105 episodes in which countries were able to reduce polarization from pernicious levels for at least five years. “Public resistance to reforms often stems more from concerns about fairness, trust and misperceptions. To gain support, policymakers should improve communication, engage the public in shaping reforms, and address potential harms with tailored support to build trust through transparent, participatory processes”, says Subran.