A succinct overview of political risk issues in the early XXI century

Quid Periculum? Measuring and Managing Political Risk in the Age of Technology By Chris McKee & Peter Marber

  • How do you define political risk in the 21st century? Political risk in the 21st century stems from the global political ramifications of the end of the economic, military and cultural dominance of the Western
  • Do you believe political risks have increased, decreased, or stayed the same since 2000? Political risks have increased markedly since 2000. In the beginning of the 21st century, the convergence of three risks is looming. First, climatic-related migrations from developing to developed countries, with consequences on domestic socioeconomic stability and rising populism. Second, mounting risks of geopolitical turmoil between China and the United States, that would be triggered by economic and trade competition, or by periphery challenges (North Korea, Iran, Venezuela, Cuba…). Third, rising risks of socio-political disturbances in developed countries given that the social contract between society and governments is unraveling. The weakening of institutions’ credibility creates conditions for a crisis of social mediations, which erodes the power and trust of traditional channels for expressing frustrations and social demands, such as political parties, unions, and social
  • Have political risks increased or decreased in advanced countries? If so, what might be the reasons?

Until the late 1980s, political risk was considered the monopoly of developing countries due to institutional and infrastructural weaknesses. In particular, weak institutions and the concentration of wealth and political power resulted in a combination of corruption and repression. Large and numerous social turbulences occurred in fast growing developing countries, often based on raw materials and hydrocarbon resources, with deep-seated poverty and little inclusive development prospects. However, political risks increased in advanced countries because governments lose credibility to meet people’s demands for increasing levels of prosperity, equality, and security. In the OECD, the future is no longer perceived as a linear trajectory of economic and social progress. The expectation of a steadily growing income over time has become harder to meet in most capitalist developed countries, as growth shrinks and job uncertainty grows, undermining the status of democracy.

  • Have political risks increased or decreased in emerging markets? If so, what might be the reasons?

In developing countries, socio-economic modernization that is not matched by institutional development and inclusiveness breeds political turmoil and corruption. The pace of economic change is often faster than the simultaneous development of socio-institutional channels to mediate and soften the emergence of new political demands, including in the sphere of immaterial goods and services, such as access to information, labor unions and working rights, political parties and associations, and democratic demands. Consequently, political risks increase in emerging markets, with a number of “failed states”. A fragile and weak state is a state whose institutional framework is too weak to provide equal opportunities for sustainable and inclusive development. Due to institutional weaknesses, failed states can no longer perform basic functions

 

such as education, security, or governance, due to fractious violence, weak institutions, corruption, or extreme poverty. In emerging countries, nation-states fail due to internal violence or to external destabilization. Consequently, governments lose legitimacy, and the very nature of the nation-state itself becomes illegitimate in the eyes and in the hearts of its citizens. Examples are many: Haiti, Zimbabwe, Venezuela, Congo, Syria, Libya, Tunisia…

  • Do you believe that globalization has increased or decreased political risk? The globalization of the market economy has increased volatility and the spill-over effect of local and regional contagion, making political risk more complex to analyze, predict, and manage. Globalization means that domestic conditions are shaped, to an ever-greater degree, by occurrences
  • Have you ever made an investment that was negatively impacted by political risk? How was it resolved? Sri Lanka’s bonds, but we sold just in time!
  • In what ways can investors mitigate political risks?
    • Reliable Information
    • Economic Intelligence
    • Advisory services
    • Insurance (MIGA, Coface, Marsh…)
    • Calling Bouchet J
  • What information helps you manage political risks?

IMF reports, personal network, combining and crossing wide range of information sources, traveling…

  • Over your career, how have political risks changed? Are there certain kinds of risk that are more prevalent today than the past?

Political risks have changed due to the spillover effects of the global economic system: trade and economic turbulences such as lower commodity prices and weakening terms of trade affect countries’ populations very fast.

  • Over your career, what event has been the biggest political risk surprise? Brexit, Cataluňa, Tunisia
  • What new political risks do we face today versus twenty years ago?
    • Erosion of the multilateral order that emerged in the aftermath of WWII until the early 1990s
    • Erosion of the sense of national identity in developed countries that provided a combination of social order and economic growth
    • Emergence of global terrorism
  • In terms of political risk, which countries worry you the most and why?
    • Iran (due to Trump’s obsession)
    • France (due to erosion of national identity)
    • Pakistan (due to fundamental Islamism and nuclear bomb and tensions with India)
    • Turkey (due to Erdogan’s nationalistic and populist stance)

 

  • Tunisia (due to weakening institutions and growing demands for jobs, good governance and inclusive development)
  • Which countries have you seen the most improvement in terms of political risk (meaning, where risks have decreased)? Which countries have slid backwards?

Improvements:

  • Mexico
  • Algeria?
  • Uruguay
  • Ukraine
  • Vietnam
  • Greece
  • Portugal
  • Senegal

Worsening:

  • Pakistan
  • Honduras
  • France
  • Tunisia
  • Peru
  • Cuba
  • Venezuela
  • Brazil
  • Ivory Coast
  • Looking out ten or twenty years, what political risk surprises might we see?

Political fragmentation in the EU with lower growth, weakening prosperity, and growing wealth gaps, and socio-political turbulences!