POLITICAL RISK ANALYSIS

What is meant by POLITICAL RISK ?

Why is it important to know how to carry out a POLITICAL RISK ANALYSIS ?

What tools can be used in a

POLITICAL RISK ANALYSIS ?

WHAT CONSTITUTES A

POLITICAL RISK ?

Political risk is a type of risk faced by governments, investors, corporations, etc. All actors have to calculate the risk of strategic,

financial or personnel loss caused by e.g. social and macroeconomic policies (fiscal, monetary, trade, investment, industrial, income, labour,

development …. legislation) or events related to political and social instability (terrorism, riots,

coups, civil war, insurrection, etc. ).

Examples:

• Shifts in political power

• Corruption, legal and bureaucratic irregulatories

• Ethnic, religious conflicts

• Class conflicts – social unrest

• Regional conflicts

• Terrorism

• Civil war

• Natural disasters - Environmental crisis

• External threats

POLITICAL RISKS are often poorly understood

and consequently poorly handled!

• Many actors (corporations) have underestimated the need for special

competence to evaluate political risks.• Economic calculations are regarded to be more

straight-forward (scientific) and easier to carry out and understand.

• Ekonomic actors too often assume they are qualified to also make political risk

assessments.

INVESTORS ARE CONCERNED ABOUT:

• Political and economic system stability, predictability, acceptable ethical standards,…

• Reliability of government (legislative bodies), legal system (courts), administrative system (state and local agencies), local labour force,

infrastructure, …

• Security of assets, personnel, property

WHAT NEEDS TO BE DONE ?

• Qualified POLITICAL RISK assessment

• Qualified security surveys and crisis management planning

Identify, assess and calculate the likelihood of political risks:

• Political risks (Political system)• Economic risks (Economic system)

• Legal and institutional risks (Legal system)• Social risks (Social system)

• Corruption (Economic, political, social, legal system)

• Administrative risks (Bureaucracy)• Business culture

• Security of personnel, financial and physical assets

THE STATE

• Territorially defined units

• Sovereignty

• Exercise ultimate internal authority

• In most cases the most powerful actor on the world stage

• Base for citizenship/identity

• International diplomatic recognition

The Political System (Internal structure):

• Monarchy – Republic ?

• Democracy – Dictatorship ?

• Unitary, confederal or federal system ?

• Parliamentary democracy or ...?

• Multiparty system or ...?

• Electoral system ?

• Administrative system ?

• Type of Government • Type of Policy Process

• Political Culture

• Actors (formal/informal power) – Domestic and External (the ”two-level game”)- The Government/the Opposition

- Other actors (organizations, corporations, interest groups, mass media, …)

- External actors (states, organizations, corporations, intererst groups …)

• Public Opinion (domestic and external; gender, age cohorts, regional factors, …)

”Good Governance” –

• Participation

• Rule of law

• Transparency

• Responsiveness

• Consensus orientation

• Equity and inclusiveness

• Effectiveness and efficiency

• Accountability

Who is responsible for what?

Supranational level

National level

Regional level

Local level

Stability or tension ?

State authority challenged by:

• Internal opposition

- Minority groups (alternative governance)

- Organized econ/pol interests

- Guerilla/terrorist groups

• External actors

- ”Big powers”

- Alliances

- International organizations (Int. law)

- Popular movements (HR, Environ)

• EVALUATE ALTERNATIVE STRATEGIES TO HANDLE POLITICAL RISKS

• IDENTIFY TRIGGER MECHANISMS

• IDENTIFY CONTROL MECHANISMS

• PLAN ACTIONS TO BE TAKEN IN CASE RISK IS EXPECTED TO NEGATIVELY AFFECT PLANNED

ACTIVITIES

• EVALUATE RESULTS OF RISK ANALYSES AND ACTIONS TAKEN