Nigel Gould-Davies - Tectonic Politics: Global Political Risk in an Age of Transformation

Acknowledgments

Many people helped this book on its journey from thought to print. A few wished to remain anonymous; I would like to record my thanks to the rest. Guy Gouldavis, Simon Landy, and Hans Vriens read the whole manuscript and offered invaluable comments and suggestions. Many others generously shared their time and perspectives, in particular: Eric Thun, Steve New, Frank Tsai, Rosie Hawes, Doug McKay, Rob Macaire, Richard Bridge, Anand Menon, David Lubin, Tim Ash, Max Hess, Robert Court, Karl Jackson, Anthony House, Matthew Shaddick, David Beers, Mike Mazarr, Mike Orgill, Tricia Frank, Chris Pagett, Phil Morgan, Stuart Eldon, Mark Houghton, David Leal, Marianne Blamire, Adam Gross, and Claus Meyers research seminar at Mahidol University International College.

I would like to thank Caroline Soper and Amanda Moss at Chatham House for supporting the book from its inception; Bill Finan and Elliott Beard at the Brookings Institution Press for expertly guiding the manuscript through the production process; and Shannon Granville for improving it with lean and astute copyediting.

I am grateful to the following for permission to reproduce their graphs: David Beers, Jamshid Mavalwalla, and the Bank of Canada on sovereign defaults; Chris Hajzler and the World Bank on nationalizations; and Anthony Kim and the Heritage Foundation on economic freedom.

I owe more than gratitude to Jo-Anne Pugh, Charles Romney, Raushan Nukezhanova, and Gwen Robinson for their advice and friendship. Karmakamet caf in Bangkok supplied the writers fuel of coffee and ambience, and Phil the engineer the remark that unwittingly sparked this book.

The Softness and Hardness of Political Risk

I have two people working on political risk, and that is probably one too many.

Thus spoke the senior executive of an oil supermajor, a company with global operations in the sensitive business of extracting resources from the sovereign territory of other countries, in 1977. The wave of oil nationalizations had just peaked, and the turmoil of the Iranian revolution lay ahead. But in this seasoned leaders view, understanding politics merited the efforts of perhaps one of tens of thousands of employees.

This view would be outrageous today. It was not then. A generation ago, few companies thought about world politics, even those that should have been doing so. They did the things companies have always done: bought, produced, and sold; invested and innovated; competed for markets. But they paid little attention to understanding, and even less to influencing, the ways other countries and societies worked.

They were not indifferent to politics. Businesses have never been innocents at home, but have always followed and sought to influence political decisions and the processes that produce them. Even in the most stable, law-governed systems, business is a key element of the informal constitution of power. But a generation ago, few companies took an interest in politics abroad. Those most likely to do so were a small number of large western companies investing in less-developed countries where state institutions were too strong and unpredictable or too weak and unreliable. But even among these, some made a virtue of saying: Were not political. We focus on business.

Today, the situation is fundamentally different. PwCs 2018 global survey of chief executive officers (CEOs) found that five of the top eight risks that CEOs are extremely concerned about are political. It concluded that

CEOs across the world are increasingly anxious about broader societal threatssuch as geopolitical uncertainty, terrorism, and climate changerather than direct business risks such as changing consumer behaviour or new market entrants.

But while the significance of global politics for markets is escalating, the capacity to manage its impact is declining. As a consequence, even though all aspects of business have grown in complexity, the challenges that politics create have risen more than any other traditional source of risk. This chapter explores three questions:

1. How has political risk evolved?
2. Why has political risk proved so difficult to understand and engage?
3. How can political risk be better understood and engaged?

The Evolution of Political Risk

All of life carries risk, and economic activity is a part of life. Where market actors face risks that are infrequent, low impact, or manageable, they can create value through production and exchange. But frequent, severe, or unmanageable risks will hinder value creation. Production and exchange themselves always carry risks, including process integrity, safety, and changes in price and demand. Such risks are intrinsic : it is impossible to imagine production and exchange taking place without them. They can be better managed or mitigated over timemany have fallen significantlybut never eliminated entirely. Production and exchange face extrinsic risks. too, ones that arise from outside these activities themselves. Extrinsic risks take three forms: nature, criminality, and politics.

Natural forcesstorms, floods, droughts, volcanoes, earthquakes, disease, and otherscan destroy assets and goods, and hinder trade and transport. In the long sweep of premodern history, when technology and markets changed slowly at best, nature was the major determinant of annual success or failure through its effects on harvests. Nature still has a major impact today. Total losses from disasters now run at around $200 billion a year, with over 80 percent of these caused by natural (rather than manmade) events.

A second source of extrinsic risk is crime, primarily the illicit transfer of economic value through theft and fraud. Crime destroys assets and goods, raises costs, hinders trade, and deters investment. There is no clear estimate of the global costs of all crime specifically for business, but cybercrime alone now costs $600 billion a year.

The third source of extrinsic risk is politics. We all have an intuitive sense of what politics means, but may find it harder to define the term precisely. Modern political science offers a clear and helpful concept: politics is collective choice that is binding on a community. To see this, draw a contrast between politics as the domain of collective choice and economics as the domain of individual choice. Economic choicesfor example, what to consume or produce, or what kind of employment to engage inare individual and voluntary. Such choices will be constrainedwe may not be able to buy everything we want, or choose the exact job we wantbut they are not coerced. We make these choices, and no one else forces us to do so. Furthermore, these choices affect only the person who makes them and other, similarly consenting individuals who freely enter into voluntary, contractual relationships (for example, of sale or employment). By contrast, political choices are collective and binding. They may be a consequence of individual decisions (in a dictatorship, the choice of a single leader; in a democracy, the choices of a majority of citizens), but everyone in the community is obliged to accept these decisions whether or not they support them.

Economic choices, then, are individual, consenting, and voluntary. Political choices are collective, compulsory, and coercive. will show that the interaction of these two forms of choice lies at the heart of any political economy. Political decisions are enforced in two ways. The first and more familiar way is by sovereign power exerted from above. The second, newer, and increasingly significant way is the informal enforcement of norms and values through social pressure from below. Political risk arises when market production and exchange are hindered by attempts to enforce collective outcomes in either way, whether from above by states or from below by civil society.