Understanding political risks

Understanding political risks

A 100 years ago, the expression “political risk" would have been a meaningless term. Stodgy statesmen argued about empires, risks of war (without explicitly using the term risk) and, perhaps, a bit about that troubling thing, nationalism.

Much has changed since then, as has the nature of such risks. Today, as reported in a Mint story on Tuesday, political risk is a big-ticket item, keenly tracked by statesmen and big corporations alike. What has changed? Mint listed top 10 risks as analysed by the Eurasia Group, a political risk research and consulting firm, in a recent report. The top risks: US-China relations, Iran, Indo-Pak relations, Japan, and climate change, among others.

At the onset of the Cold War, most of the above listed concerns did not matter. “Red" China was within the Soviet sphere, Iran a colonial backwater, India and Pakistan could not sort out their animosity and, frankly, the world could not care less. These, in a sense, were “global" problems that Washington and Moscow could sort out in discussions across the table, in Vienna. The risks were large (nuclear war being the top one), concentrated and manageable. Countries did not favour trade and world gross domestic product was a fraction of what it galloped to 50 years later.

In the 21st century, the world is a very different place and the nature of these risks has changed dramatically. They are no longer concentrated and their dispersal means that their management (via international political coordination) is no longer possible.

For businesses, too, the situation is very different. In the Cold War, the biggest risk for investors in what are today called emerging markets, was expropriation by host country governments. Tinpots and Western educated democrats alike believed in seizing foreigners’ assets. Today that risk has, by and large, disappeared. “Non-state actors" pose more danger to investment than policy discontinuities. This is a world in which risks can be known, risk mitigation strategies chalked out, but their fundamental sources remain impervious to elimination.

Can something be done to change matters? A microeconomist would, of course, scoff at such a notion: A world with billions of economic agents cannot be controlled, save by the magic of prices. A political scientist may have a different take: Study the logic of empires.

Are political risks more magnified today than in 1950? Tell us at views@livemint.com