Political Risks on the Rise all Over?

11/13/2014 05:58 EST | Updated 01/13/2015 05:59 EST

Ask anyone you meet on the street whether political risk has risen in the last few years, and you'd likely get a convincing "yes." Crisis has fed our appetite for media sensation, and on the global political front there has been no lack of material. What appeared to be rock-solid regimes fell in mere days, triggering copycat events elsewhere with very similar results, and sending tremors across the planet's political landscape. Prolonged stagnation seems only to have exacerbated tensions, suggesting a new era of heightened political instability. Have unrest and upheaval really risen, or have we fallen prey to media hype?

Several measures attempt to provide an answer. Consider the Aon Political Risk Map, a tool for assessing political risks across the planet. Back in 2005, it seemed that political risks were ebbing, making the world a safer place. Three years later, upgrades to risk assessments outpaced downgrades almost threefold. Then in 2009, an about-face: not only did downgrades outpace upgrades, but a new 'very high' risk category was created. By 2012, there were seven times more downgrades than upgrades. Things got better in 2013 -- briefly. But this year is again tilted deeply toward downgrades, with each of the BRICS countries negatively affected.

Further evidence is provided by the Global Business Barometer. In its latest survey, the barometer indicates that 44 per cent of the 1,500 executives surveyed cited political risk as a key risk they face, the highest result in the survey's short history. While the results have fluctuated in the past few years, it is noteworthy that the recent result is higher than the level of concern registered immediately following the onset of the Arab Spring.

The MIGA-EIU Political Risk Survey points to increased concern among international investors. When asked about the constraints to their foreign investments, they ranked political risk second only to macroeconomic instability. This is substantiated by a reference to the UNCTAD World Investment Report, which has been recording disputes between investors and states since the mid-1980s. The number has surged in that time from almost no activity to 50-60 new disputes annually.

Ten years of data in the Fragile State Index indicate a disturbing trend. Since 2005, the number of states in the 'high alert' and 'very high alert' categories more than doubled. This Index measures the degree of control a state has over its territory and the ability of the government to implement policies and provide reasonable public services.

Put these indexes together, and a general picture of increasing political risk emerges. Our hybrid index is up by over 50 per cent since 2005, a dramatic increase that, if sustained, paints a scary picture for future international transactions.

Firms that are active internationally are signaling that these messages are registering with them. The higher perception of this class of risks has led to increased demand for political risk insurance. This suggests that the increased concern is not necessarily inhibiting international activity, but that firms are still active and desiring to mitigate their risks through available financial instruments.

If this is indeed the attitude, it's a relief. International investment flows are a critical piece of the evolving global trade landscape. As the world gets back to the business of growing, international investments are not just expected to resume, but to grow more intense -- for normal reasons like access to resources, lucrative markets, production clusters, and research and development centers -- but also for access to large pools of labour.

Although the rising risk trend is clear, there is still not enough data to conclude that the change is structural, and will be sustained into the future. Sure, the ability to mass-organize is unprecedented, thanks to communication technology. But another well-known driver of dissent is prolonged economic weakness. Time will tell which factors dominate in the future.

The bottom line? Political risk is clearly on the rise, and Canadian firms active in foreign markets need to be aware -- of both the risks, and of the means available to mitigate them. And if we're fortunate, renewed growth may reverse the trend.