By Ricardo Solano Olivera, MSc.
CEO of Riesgos Políticos.
Last Friday (08.03.2019), I had the opportunity to attend The Fletcher Political Risk Conference 2019, at The Fletcher School of Law and Diplomacy of Tufts University. The guiding theme of the conference was Uncertain Futures: Trade, Power, and the changing nature of Political Risk. The speakers were top businesswomen and some of the most recognized consultants on political risks in the US. With no doubt, this conference is in the process of consolidating itself at the center of the political risk thinking, both in business and academia.
Condoleezza Rica and Amy Zegart establish in the book “Political Risk, how businesses and organizations can anticipate global insecurity” that political risk is the probability that political decisions impact businesses. In a globalized world, as the one where we are still living in, big / transnational companies and financial institutions are impacted by actions taken in remote localities all over the globe. Supply chains and scale economies can be distributed in many countries in the five continents, which -of course- reduces costs but increases the vulnerability of organizations.
Businesses and markets like certainty, but the world nowadays is not providing it. The difference, according to Meredith Sumpter, Head, Research Strategy & Operations of Eurasia Group, is that uncertainty used to come from emerging markets or developing countries, however, what we are experiencing today is that uncertainty is coming from the developed world. I would add, not only from the developed world, but from the biggest economies, meaning, from the G-20. Although the bet of the speakers of the conference is that UK will reach an agreement with the EU, I think that is very optimistic and, even though there are incentives for reaching one, we see a lot of incongruence of politicians all over the world. As it is pointed out in the Rice and Zegart’s book, decisions are made by people, not by machines, and the human nature tends to make mistakes, leaving behind facts and taking decisions based in emotions. Unfortunately, social scientists are not in charge of taking the decisions… not in Europe, not in the US.
For me, it is important to talk about uncertainty in the G-20 economies because it gathers the countries that more matters for the financial stability of the world. That is the real danger, that uncertainty is also coming from the most important developing countries: BRICS, Mexico, Argentina, Saudi Arabia, and Turkey, for example. When developed economies cannot be the driving forces behind world economic growth, then developing countries can replace them, but when neither developed nor developing countries are in a situation of assuming that role, the world is in serious problems. We are seeing symptoms of economic deacceleration everywhere, mainly in the US, Europe and China. According to Eurasia Group, France, Italy, and Spain have a negative market outlook in the short-term, while UK, Italy, Mexico, Colombia, and Turkey have it in the long-term.
Given this scenario, how can businessmen and women make sense of politics? How can they make investments in the long term? The answer is through a political risk analysis. The obligation of organizations is to stop thinking that political risks are only for businesses established in the US or Europe, but to start looking to the south, to Latin America and Southeast Asia, so they can open new markets, mitigating the inherent risks of this countries. A good assessment can make the difference between having or avoiding a crisis, and helps to protect the organizations’ assets while expanding businesses by improving their profits.
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