John F. Phillips
The recent blockage of the Suez Canal is a great example of the political risk that can rear its ugly head without notice. The disruption of international trade was significant and the impact of the accident will continue to reverberate for weeks and months to come.
Throughout the world, companies are trying to cope with the impact of the incident. In the United States, General Motors idled assembly plants because of a shortage of semiconductors used in automotive computer systems. The price of oil increased as some deliveries were disrupted. Ships were forced to traverse the Cape of Good Hope as the blockage disrupted the critical sea route between Asia and Europe, lengthening delivery times and increasing costs.
One of the challenges in trying to measure political risk is the difficulty in measuring the broader implications of one unanticipated and isolated incident or event in the over all scheme of things. Political risk may not be readily apparent and its impact may not always be obvious.
Political risk is difficult to identify and measure because it tend to be more qualitative, rather than quantitative, in nature. In the field of economics and finance, one can look at hard data, construct statistical models, use those models to examine correlation and imply causality, and then construct decision making paradigms based on hard quantitative measures.
While these quantitative tools are useful, and are used in the evaluation of political risk, the understanding, identifying, and mitigating of political risk is also based on an intuitive understanding of political behavior and events and how these behaviors and events impact a particular situation. In their book Political Risk: How Businesses And Organizations Can Anticipate Global Insecurity, former Secretary of State Condoleezza Rice and foreign policy scholar Amy Zegart, state it best:
“Political risk is hard to measure because it involves anticipating events that have a low probability of occurrence, but would have major consequences if they did occur.”
The blockage of the Suez Canal is one of those low probability, but high impact events that are so difficult to anticipate. How does one react to something that has rarely occurred in a peacetime environment?
If the incident in the Suez Canal has taught anything, it is the lesson that political risk is real, impactful, and an important consideration in business and organizational planning. It cannot be done by amateurs. Political risk analysis and mitigation should be considered an important part of the planning process.
As the ripple effect of the Suez incident begins to fade, most companies and organizations will return to business as usual and anticipation of political risk will once again become an afterthought, that is, until the next Suez occurs. Then companies and organizations will experience another “OMG” moment, scrambling to figure out what’s going on and the impact the event will have.
In the fast paced world in which we live, they do so at their own peril.
What are you doing to evaluate, anticipate, and mitigate political risk?