India’s position in the Global Political Risk Index (GPRI) remained unchanged from 2006 to 2007. The biggest gainer in 2007 was China, which saw its score increase by five points, while the biggest loser was Pakistan, which saw its score go down by a similar amount.
Mint has partnered with the Eurasia Group, a political and economic risk analysis firm, for the GPRI. The index is a composite measure of the state of a country’s government, security, society and economy. All indicators are scored on a scale of 0 to 100. The higher the number, the greater the political stability.
In China’s case, according to the Eurasia Group, the increase in GPRI score is on account of President Hu Jintao’s success at consolidating his position in the November congress of the Communist Party. And in Pakistan’s case, the decline in GPRI score is a manifestation of President Pervez Musharraf’s struggle to hold on to power and the ensuing political instability in the run-up to the elections in 2008.
The index was released in the wake of former prime minister Benazir Bhutto’s assassination and just as the Pakistan government decided to postpone elections. However, the index was based on the situation in the countries it covers as on 18 December, well before Bhutto’s death. It is likely that these factors will make Pakistan’s GPRI score fall even more in January.
Government and economy
The Eurasia Group’s analysis shows that across the 24 emerging markets covered, government stability deteriorated. The exceptions to this were China and Poland. However, this decline was more than offset by an increase in economic stability scores, an indication of improved financials across most of the countries. Many of the countries have also built up substantial foreign exchange reserves. Countries that have done so include India, China, Russia, Brazil and Saudi Arabia. According to the Eurasia Group, these reserves provide a buffer against crises such as flight of capital, or the inability of countries to pay off debts or pay for imports.
One risk most countries face is inflation, which is rising with growth. However, most countries, including India, have managed to keep it in check, and according to the Eurasia Group, the risk hasn’t become significant enough to affect the economic stability score of countries and, consequently, their overall GPRI score.
Faltering government stability in 2008
Pakistan, Argentina, Venezuela and South Africa are countries that face significant government instability, though the situation is better in the other three countries than it is in Pakistan. In Venezuela, President Hugo Chavez’s economic policies are fuelling inflation, which has topped 22%. In Argentina, the main concern is energy shortage, while in South Africa, it is the rise of Jacob Zuma to the presidency and the resulting increase in tensions within the party.
The Eurasia Group said that risks in India, Saudi Arabia and Thailand are less “severe” but “need to be monitored.” In India, it added, the potential for elections could “induce uncertainty because neither the Congress nor the Bharatiya Janata Party appears very strong at present.” In Thailand, instability could arise from attempts by former prime minister Thaksin Shinawatra to re-enter the country and participate in the political process.
Brazil, China, South Korea, Poland and Russia have positive outlooks in the GPRI scorecard. The ratio of Brazil’s debt to gross domestic product will continue to decline despite the country not renewing a tax on financial transactions. China’s stable government will help it cope with possible overheating of the economy and rising inflation. And the 2008 Olympics will help boost the country’s image. Poland’s new coalition government is moving towards an open-market economic policy. And Russia, apart from benefiting from a strong economy, will likely see Vladimir Putin step down and be succeeded by Dmitry Medvedev—the first time in history a popular Russian leader in good health has stepped down.
The Eurasia Group warned that investors “will need to make increasingly sophisticated discrimination among emerging market opportunities in 2008.” “With favourable global economic conditions potentially on the decline, a variety of political risks that has receded into the background over the past year will again take centre stage,” it added.