Thinking about Political Risk in Advanced Economies

The majority of students, scholars, and practitioners working in the sub-field of political risk are by-and-large engaged with the political factors that can affect investments in emerging economies and/or sometimes ‘unstable’ developing nations, where the stability and profitability of foreign investments or business ventures is more difficult to guarantee or predict. Developing nations are at the forefront of political risk analysis precisely because of the business opportunities that accompany fairly rapid economic growth and development, but globally-minded companies know that with those opportunities come inherent risks. In many cases, firms venturing abroad thus require detailed political and economic risk assessments a priori in order to identify potential impediments to their investments. Indeed, in many emerging economies, realities such as rampant corruption, the threat of expropriation/nationalizations, legal and regulatory insecurity, civil strife or political violence, weak state institutions or adverse policy changes, and a host of other factors continue to be significant (and common) political risks that foreign firms must consider and seek to mitigate when investing abroad. These are important topics that the Fletcher Political Risk Group has examined from a variety of perspectives. Moreover, over the past few years we have seen the importance of political risk analysis increase across the developing world, for example regarding Russian aggression in Ukraine and peripheral Europe, Iranian sanctions, Brazil’s economic woes, the Chinese stock-market crisis and difficult transition to lower-growth, continuous upheaval in the MENA region, terrorism and ethnic violence in Africa, and a variety of other warranted issues that deserve our attention in both an economic and civic sense.

However, I would also suggest that the greater political risk community ought to keep a better eye on what are often considered to be more stable economies and advanced liberal democracies – in other words, the so-called ‘developed’ economies of the West. Though many academic literatures, consultancies, and businesses are focused on the potential opportunities and risks in emerging economies as outlined above, there is ample space—and indeed a necessity—to consider similar, if more subtle, political risks in the West. Granted, there are fewer developed/industrialized economies in the world than there are developing ones, meaning that there may be scarcer ‘new-investment’ opportunities in the former than in frontier or un-tapped markets, but the past assurances of steady economic growth and an open and accountable political environment in the West may be on the wane. A decline in relative political-economic stability, and in investor confidence in formerly ‘stable’ Western democracies is something that should not be overlooked in the world of political risk. It would be prudent for students to investigate further the economic, institutional, and social factors that can determine investment successes in democratic regimes and advanced market economies as well as popular emerging ones.

Today, the geo-political equilibrium is rapidly changing in a globalized world, and the relationship among politics, ‘policies,' and the activity of international investors has been further complicated by the persistent economic and financial crisis. Though certain developed economies have recently returned to the path of economic growth, their future prospects are hard to predict. Given the complex trajectory of the EU in the post-financial crisis period, including its perennial struggles to keep up economic growth, and recent developments in reaction to deep austerity measures that have swept across the continent, dark clouds persist on the horizon. This can be reflected through the rise of protest-parties on the left such as Syriza in Greece, or Podemos in Spain, further populism and anti-establishment in the relative centre such as the 5-star movement in Italy, as well as an unfortunate rise of far-right and nationalist parties and movements embodied by the Euro-skeptic and anti-immigration stances of Le Pen’s National Front in France, Salvini’s Lega Nord in Italy, or similar right-wing governments in Central-Eastern Europe. Also alarming is the spectre of not only just a Gr-exit, but a Br-exit, given the UK’s call for a referendum on EU membership in 2016. This could spell even more serious trouble for the already sluggish Eurozone, and its many unhappy members. Finally, the migrant crisis from the MENA region and specifically the influx of Syrian refugees has seemingly pushed the EU to the breaking point, both socially and politically, with no real resolution in sight to the humanitarian issue. These issues, coupled with unstable political regimes on Europe’s southern borders, continuous corruption in places like Italy, high levels of public debt, and an increasingly delicate banking system across the continent, do not bode well for prospective investments, and contribute to significant political risks therein.

On the other side of the Atlantic, though economic growth and financial stability may be in better shape in North America, we are not immune to political risks either. The continued rise of a Trump-styled anti-establishment Republican party with increasingly negative rhetoric only contributes to the worsening of American hyper-partisanship and the risk of U.S. government stalemate over key policy issues (including a Supreme Court appointee) which has been on the rise for years. Moreover, the political-economic difficulties that have arisen in rich economies such as Canada due to the fall in price of crude oil is also something to keep an eye on. Ultimately, it is evident that politically charged risks are not confined to emerging economies, but they are realities that all countries will have to grapple with in different ways in a complex global market.

- Julian M. Campisi, Ph.D. Candidate, Political Science, York University, Toronto

 

Stephen AllenComment