Economic history reminds of just how strange the recent fetishization of the free market really was. A free market based on economic ‘laws’ was always an intensely political object – constructed, regulated and protected by states. Yet investors accepted the premise because it let them ignore messy political questions and instead operate in an abstract realm of quantifiable probabilities. This pristine arena, promised and supported by finance-led globalisation and its flawed economic models, has in the last few years been trampled into a muddy field, mined with socio-political hazards. As Gillian Tett argues persuasively, we have  entered a new age of volatility, in politics and society as much as in finance and economics.

Western companies, driven by stagnation in their home markets into ever more adventurous plays in emerging economies overseas, must deal with immense complexity, uncertainty, and unclear ‘rules of the game’. But these have always been the costs of entry into emerging markets. What is most striking about the current moment is that deep political uncertainty now permeates many of the most developed, highly-traded markets in the world. The malignant growth of too-big-to-fail banks, the backfiring intrusions of politicians into European bond markets, and the regulatory labyrinths that run through the energy sector are just three examples where politics is determining payouts to a remarkable degree. Meanwhile, state capitalism is resurgent even as trade liberalisation wanes, priming the world economy for a tilt into economic nationalism and protectionism.

All of which is to say that, though it never really went away, political risk is back with a vengeance.

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Political risk can be defined as the risk of strategic, financial, or personnel loss arising from non-market factors such as “macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labour, and developmental), or events related to political instability (terrorism, riots, coups, civil war, and insurrection).”* Monitoring political risks is always prudent, but it is especially important at times like these, when political developments threaten to overtake ‘economic fundamentals’ in so many areas. The following are just a few examples of headline issues that international businesses operating in the Asia Pacific region must contend with. A follow-up post will address strategies for monitoring and mitigating such risks.

A ‘hard’ landing in China

Policy actions in China will be critical to performance in the region as a whole. Evidence of overheating and a proliferation of bad loans in the banking system mean that a sharp slowdown in growth is expected soon. However, it is likely that the government will do everything in its considerable power to postpone this until after the leadership transition scheduled for the end of 2012.

Regional fragmentation

The basic contours of economic, political and security integration in Asia are far from settled. There are a host of competing institutions, blocs and alliances (such as ASEAN, APEC, the East Asian Summit and the Shanghai Cooperation Organisation). ASEAN’s model for economic integration, the European Single Market, has been deeply undermined by the euro crisis. An escalating security competition between the superpowers of China, India and the US has yet to play out. These issues present little immediate threat to operations but in the medium term the status quo is certain to be upset.

Territorial disputes

More specifically, there are a lot of territorial disputes in the region, many of them centred around the South China Sea, where Vietnam, the Philippines, Indonesia, China and Taiwan (among others) have competing claims. Most analysts see these disputes as the most likely trigger for future armed conflicts in the region.

Protectionism

A recent EU report found a ‘staggering increase’ in protectionist measures taken by governments across the world, many of them in Asia.  This, combined with the undermining of the WTO by the failure of the Doha round of talks, is bad news for the free trade on which the strong positive forecasts for APAC are based.

North Korea

Outsiders can never really know what is going on in North Korea. If Kim Jong-un fails to consolidate his power or makes any strategic missteps, the regime could fall very quickly. The threat of an unprovoked act of belligerence on the South also remains. Either of these outcomes could quickly escalate into a serious conflict with unpredictable regional implications.

Domestic tensions

Civil conflicts, rebellions and domestic terrorism are still issues in many countries across the region from Myanmar to Sri Lanka, Nepal, Thailand, the Philippines, and Indonesia.

Disaster risk and resource scarcity

The number and intensity of extreme weather events and resource stresses in the region will increase in the years ahead as environmental pressures rise. Many of the high growth markets in APAC are vulnerable to one or both of these threats, as are crucial elements of the global supply chain.

A ‘disorderly’ worsening of the Eurozone crisis

Many APAC economies are already suffering as a consequence of the Eurozone crisis, particularly those with strong trade links to the continent or with highly developed financial systems. Merchandise trade has collapsed, while European deleveraging is hitting banks in South Korea and Singapore particularly hard.

US growth stalling as it hits a ‘fiscal cliff’ in late 2012

Longstanding policy deadlock means that around $5 trillion worth of tax and spending decisions must be made after the November presidential election and before the end of 2012. Whoever wins, there is a significant risk that the outcome will trigger a fresh recession in the US.

Rising tensions in the Middle East triggering a spike in oil prices

The Arab Spring and the US withdrawal from Afghanistan have left the Middle East vulnerable to political shocks as Turkey, Saudi Arabia and Iran vie for regional influence. Any increase in violence or social turbulence has the potential to lead to an oil price spike.


* Kennedy, Charles (1988). Political Risk Management: A Portfolio Planning Model, Business Horizons, Vol. 31, p.21.

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