Archive for the ‘Political Risk Theory’ Category

Where should foreign aid go?

The latest World Development Report, the flagship annual publication of the World Bank, proposes that from now on, a much bigger proportion of foreign aid should focus on issues of political conflict and justice.

This might seem natural, given all the wars, violence, terrorism, and displacement around. And political considerations have always influenced aid.

But putting political risk as the central purpose of aid is a sea change.

When the World Bank and other Bretton Woods institutions came about after the Second World War, the initial focus of multilateral aid was infrastructure. After Europe was rebuilt, attention shifted to the “Third World” under the guise of development.

This aid, all the way through the 1980s, strengthened the state much more than the society. There were two reasons for this. First, the Cold War meant that much of multilateral aid really went to prop allies and their offices, even if they were corrupt and brutal dictators. Second, the entire “development project” pushed by the West saw the state as the key dispenser of “development,” be it the provision of healthcare or education or employment.

In the 1990s, large states crumbled under people power, from Berlin to Manila, and donors shifted to the private provision of development. Human development, highlighting individual empowerment, took the scene; NGOs like Brac and Grameen expanded.

The 2000s saw an intensification of the privatization of development to a new level. “Development” was to be achieved through globalization, i.e., foreign trade and investment [1]. This was trickle-down at a world-scale: the state became detached from both planning and provision. Development goals were planned at the international level, and the grand blueprint was set by the UN’s Millennium Development Goals.

In this approach, although implementation was said to be national, the state’s role was mainly at the regulatory level: open up borders and promote an environment conducive to free global enterprise. India in the last decade was the poster child of this approach.

Now we’re back to the future. On the one hand, if conflict is the focus, then multilateral aid will become as political as it was in the height of the Cold War. Even though the potential exists for aid to be distributed on a non-partisan basis to the most conflict-prone parts of the world, history squarely contradicts that promise. Most recently, aid was suspended in Ivory Coast, as a way to punish the autocrat Gbagbo, even though a bloody civil war was raging in the country. The dispensing of aid on political grounds will never be easy.

On the other hand, a conflict focus reinforces the neoliberal idea of development as a global private enterprise. Aid will aim to bring political peace. Once that happens, the hope is that all else will fall in place: MDGs will determine overall targets, the state will (de)regulate to allow private trade and investment to flourish, and development will be the by-product of growth.

The overall logic of conflict and security makes sense. Neither state-led nor private-led development can take place under high political risk. A main challenge will be to ensure that aid is non-political, even though aimed at politically combustive situations. Over the next few blog posts, I will discuss some of the specific challenges and opportunities of targeting foreign aid at reducing political risk.

1. Philip McMichael discusses this changeover from development to globalization in Development and Social Change: A Global Perspective (Pine Forge Press, 2007). Highly recommended.

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The US House of Representatives has just conducted hearings on “The Extent of Radicalization in the Muslim Community and That Community’s Response.” The overall premise of the hearings is directly relevant to the subject matter of this blog: local risks posed by the globalization of trends, or in this case, the globalization of extremist concepts.

The hearings were criticized on many levels, including racial profiling, persecution and vilification. The credentials of the chairman, Peter King, have also come under fierce criticism, including his well-known knee-jerk aversion to Muslims. (I call it “knee-jerk” because it is not based on evidence and analysis, but simple assumptions .) 

But my topic of interest here is risk analysis. Radicalization of Muslims was assumed to pose threat to society, and I hoped that the hearings might shed light on that. But after having followed the hearings, I shudder to say: if this represents the standard of risk assessment by the vaunted Committee on Homeland Security, then we have a lot to feel insecure about.

They hearings were one-sided; no “expert” respected by both aisles was invited. They dealt with loose anecdotes. They did not provide, nor methodically analyze, actual data and overall trends, from which one can make an informed and intelligent assessment and forecast. In the end, they were, as James Zogby noted, a “shameful” waste of public resources.

But, the hearings got wide support from the political right. Why? Over the last decade, low-quality media commentary, violent images, and existing prejudices have together created an environment where the word “Islam” automatically connotes high risk to many. No analysis needs to be done; it’s a foregone conclusion that Muslims pose political and security risks.

I’m not just claiming that. There’s ample poll data to show how attitudes toward Muslims have evolved, especially on the political right. But instead of becoming better informed about the true risks, the political right has become ill-informed about the supposed risks, and prone to replace analysis with reactionary judgements. My recent article in The Huffington Post, “The Congressional Hearings That Are Really Needed,” talks about this problem.

The article argues, in sum, that a divergence has happened in America. On one hand, Muslims in America have become more integrated, both in terms of wealth and attitudes, into the mainstream than Muslims in other Western countries. On the other hand, the deteriorating quality of US media has made the majority believe that the opposite is true. What’s really needed are Congressional investigations of these two trends, because that, not wholesale radicalization, is what’s happening in reality. And you can’t do risk analysis without first basing it on real-world trends.

Read the full article here. Comments, feedback, sharing, as always, are welcome.

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The revolts on the Arab street have occasioned a renewed interest in the measurement of political risk. And businesses are paying greater attention to political risk analysis. Both are good news. But is it just passing interest, or will this result in real innovations in risk analysis?

Typically, business analyses of political risk have involved a blend of political indices, such as those provided by Freedom House or the Heritage Foundation or the World Bank, with qualitative analysis focused on specific industries. While informative, these dwell on past and ongoing trends and events, which are then extended to forecast the future.

What has lacked is real understanding of theory. Without it, we cannot understand causality, and without knowing “why men rebel” (the title of a classic political science book), we really cannot understand the risk of rebellion and upheaval, let alone forecast it.

The point of departure of risk analysis, therefore, should be theory, especially theories of revolution. This is where political scientists, and social scientists in general, can make a real contribution to a field dominated by actuaries and financial forecasters. 

In this effort, The Economist made excellent inroads recently. Its humorous-but-apt “Shoe-Thrower’s Index” begins with theory, then garners related indicators, and then produces a risk-ordered list of countries in the Middle East. It’s not complete, but it’s a great start.

The Shoe-Thrower’s Index identifies several factors as causal in the chain of rebellion. All these are established by the social sciences. It then attaches different weights to the factors, as shown in the table.

The higher the total for a given country, the greater its risk of political instability. According to this, Yemen, with a score of over 80, is the riskiest country in the region. Next are Libya, Egypt, Syria, and Iraq, all with scores of over 60. UAE, Kuwait, and Qatar are at the lower end of the spectrum.

There are two main weaknesses in this index. First, as The Economist itself admits, it discards factors that are “hard to quantify,” including unemployment information because they’re not comparable across the countries in the region. This quantitative bias is typical of many risk approaches. More qualitative factors such as ideological motivation or support (such as between Islamism or secularism), leanings of leaders (such as between non-violence or violence), leanings of the armed forces, control over governmental employees, and ideas of justice/injustice are important predictors of not just the occurrence of instability but the duration and extent of it.

The Economist also overlooks the fact that some of the indices it uses as sources of quantitative data, such as those of corruption or democracy, are really qualitative information, drawn from people’s subjective perceptions or opinions. These are merely disguised and presented as quantitative data by attaching numbers to survey responses. Pronouncing a flat-out preference for quantitative data, therefore, is misleading.

The second important factor, which can be both quantitiative and qualitative, not included in the index is “resources.” Political scientists have shown that revolts, and specifically democracy movements, are critically dependent on organizational, technological, and infrastructural resources available to protesters. Simply put, without access to technology, such as Twitter, Facebook, or satellite TV channels, all the other “factors” may not have produced the type of instability that is sweeping through the region. Resources allow isolated show-throwing to snowball into concerted political upheaval.

In any case, the type of risk-indexing exercise that The Economist undertook is definitely a solid step in the right direction. To further improve our understanding of political risk, we need to start weighing in additional qualitiative factors.

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In the last post, I wrote primarily about political risks from the allocation of money: the government’s budget on the one hand, and individual income on the other. I argued that political risk in the medium term (5-10 years) will depend on how these two factors combine. In addition, there is one certainty that will raise the risk profile no matter which scenario materializes. This is what today’s post is about: the certainty of America’s population profile.

One type of demographic certainty is rooted in what’s known as the demographic transition theory: As societies become richer, the death rate of its population falls fast, followed much later by a fall in birth rates. Emerging markets experience a surge in people of productive age, which helps them grow real fast when combined with capital accumulation. The mature markets, with falling birth rates, lose their dynamism as the population becomes grayer.

All advanced industrial countries now confront political risks from demographic stagnation. One aspect of this involves resource transfer. Young people need to be taxed more to support rising numbers of the elderly. The elderly tries to keep this support intact by coming out to vote in large numbers during elections. In the US, every general election between 1972 and 2008 elicited greater turnout (%) from the older segments of the population than the younger segments. In the 2008 election, in which youth participation was the highest, 56% of citizens in the 18-44 years age range voted. 66% of citizens in the 45 and above age range voted. The total citizen population in the second category, by the way, exceeds that of the first category. (Calculated from US Census Bureau data.) 

Generational tussle over transfer of resources, therefore, is a certainty. (A side point: the young has tended to vote more for Democrats, and the old for Republicans.

The second aspect of the demographic certainty concerns immigration. In order to remain economically productive, the richer countries have no recourse in the medium term other than importing people from labor-surplus countries. Even though immigrant workers expand the tax base, and therefore the welfare resources available for the older generation, the greater cultural conservatism of the older generation views immigration with hostility. The older generation has voting power. Younger immigrants usually have no voting rights.

Look at Arizona, for example. 83% of the elderly in Arizona are white, and 42% of people under 25 are Hispanic. If they become citizens–a giant “if” for many of them–will they tolerate yielding a good chunk of their income to pay for the hostile elderly? Conversely, as the Economist wonders, will the old want to surrender some of their earnings to pay for public education and state universities where most of the immigrants go? While the outcome of these questions is uncertain, what is certain is that immigration politics will become nasty in an increasing number of states. Arizona, in my opinion, is the tip of the iceberg.

Demographic trends have shifted economic and political power among the states as well. As the Economist notes, “Of the 20 oldest states in 2009, 14 were in the north-east and Midwest. The sunbelt, in contrast, was home to eight of the ten states with the highest concentration of youth.”  The northeast will have fewer congressional seats and less say in presidential elections. Will the sunbelt continue to tolerate federal resource transfers to support the growing elderly in the north? The north will have to keep immigration-friendly policies to ensure an adequate economic base.

The south and the west will experience rapid population growth. The typically more conservative south will experience greater political clashes rooted in both generational and cultural gaps. So these regions will be economically more vibrant but also politically more volatile. The result will be polarization rooted in demography. Let me quote again from the Economist’s article, “One nation, divisible”:

All these conflicting interests are helping to polarise further America’s politics. In the 1976 election … 26% of voters lived in counties where one party won by 20 points or more. In 2008 a whopping 48% of voters did so. Strikingly, less than 400 of America’s 3,141 counties switched parties at the 2008 election. Politicians, like marketers, have become adept at identifying likely customers. “Bringing out the base” is the key to winning. As a result of this polarisation, satisfying a range of constituents is becoming harder. The federal stimulus revealed this well. The bail-out gratified some Wall Street bankers. Aid to state governments mostly helped workers in capital cities. But voters in places with battered housing markets got little benefit from either. James Gimpel, a political scientist at the University of Maryland, notes that areas with high rates of foreclosure, such as suburban Atlanta, were hotbeds of tea-party activism.

To me, greater political conflict, in localities around the US, between an influx of young immigrants and a larger proportion of graying population is a certainty in the medium term. During the national voting season every two years, what will transform the myriad local conflicts into election results is the voting pattern of younger citizens. They have tended to lean slightly closer to their immigrant friends than to their parents and grandparents. Will they continue to do so?

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