The Economist had made Chart of Political list on Year 2008
as in “The spread of political risk“
The spread of political risk
From The World in 2008 print edition
A growing threat to foreign investment
The terrorist attacks of September 11th 2001 had surprisingly little impact on business decisions. True, the attacks produced a growth industry in doom-laden predictions about the end of globalization. But those contemplating foreign investments carried on more or less regardless, as before paying scant attention to political risk. They based their business decisions on other things, such as a country’s economic prospects, labor costs and overall business environment. Besides, multinational companies have traditionally been a hardy breed, operating in the most inhospitable climates.
But there are signs that things are changing. Political risk has started to flash on the corporate radar. Surveys suggest that businessmen see political risk as a much greater threat than in the recent past. A recent survey of global executives by the Economist Intelligence Unit, a sister company of The Economist, found this was especially so for emerging markets, where executives identified political risk as the main constraint on investment. All the main forms of political risk (the danger of political violence, protectionism, geopolitical tensions and government instability) were seen as increasing. In the case of the rich countries, there was widespread concern about rising protectionism, about the threat of terrorism in America and Britain and about the impact of geopolitical tensions (from possible conflict with Iran to frictions between the West and Russia).
Why this heightened sense of political risk? In part it may be psychological—a sluggish reflection of an extreme risk-aversion in Western societies. Worries about the threat that terrorism poses for business are out of proportion with the real risk, which in most parts of the world remains minuscule. Fear of litigation, especially in America, may also be part of it: crippling legal claims are possible if a company’s management is shown not to have “prepared” for some nasty mishap abroad.
But to a great extent the increased perception of political risk simply reflects reality. The signs of a protectionist backlash against foreign investment are multiplying: witness, in America, the regulation of foreign acquisitions in the name of national security; or, in Europe, the defence of “national champions” and the outcry against emerging-market sovereign wealth funds; and, in Russia and Latin America, the new barriers to foreign investment and the expropriation of assets in the oil industry and elsewhere. International investment is most likely to flourish in a climate of international political calm. Yet a host of geopolitical risks threatens to disrupt global economic activity.
Although perceptions of political risk have increased, these do not yet appear to be having a significant impact on decision-making. For now, they are trumped by the perceived good opportunities for investment. But this could change in 2008. Economic and financial risks are rising again. The danger is that these could interact with stronger political-risk perceptions and sharply chill the climate for international investment.