The landscape of political risk

The landscape of political risk

Until the other day, the expression political risk conjured images of tinpots expropriating assets of multinational companies. After Egypt, the meaning has changed a bit. The landscape of such risks had already changed; the happenings in the Middle East are only hastening the process that has been on for a while.

In any stable business environment, the risks that companies confront have more to do with costs and availability of supplies: Will labour costs rise? Will raw material costs hit bottom lines? Political risks kick in when production and markets are located in societies that have unstable governments or those that are ideologically driven. Until the end of the Cold War, the problem existed in countries with abundant natural resources, those led by the military and “revolutionary" governments. The source of danger was the absence of credible guarantees on security of property.

Post-1991, many of these pariah countries became attractive destinations for investment. Tyrants turned into business-savvy “leaders". Old doubts about snatching of plant, equipment and money disappeared overnight. China, Egypt and many other countries, in spite of their authoritarian rulers, were able to generate sufficient guarantees for attracting capital. Within a span of a few years a risky political situation was rendered safe. This came about because of a change in the global political environment. The demise of the Soviet Union changed many things, chief among them getting capital and investment on the cheap by playing on rivalries between the Great Powers. After that investors had to be wooed.

The Egyptian revolution is changing that situation again. Today popular anger threatens to make these countries home to rising political risks once again. Clearly, political risks now rest in the mass of disaffected populations and not their rulers. Businesses associated with deposed rulers are in for trouble.

The other pole of disaffection is to be found in democracies themselves. Home to leading firms across the world, they are today host to a populist mood. Devotion of increasing sums for corporate social responsibility, higher corporate tax incidence and many other restrictions abound in these countries. This marks a turning of the wheel of what constitutes political risk.

Clearly, over and above the colour of individual regimes, the global political and ideological environment is increasing political risks for businesses. While it is easy to develop models to estimate probabilities of such risks locally, it is the global drivers of such risks that defy computation. The volatile situation across countries in the Middle East is a good example of this changed landscape of risk.

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