Archive for the ‘Risk Management’ Category

This article describes step 2 of 4 of the South Asia Political Forecast project. The 4 step method is described in the previous post. In the first step, I discussed the baseline for the forecast, identifying the current state of democracy in South Asia. In this step, I draw from theory to identify factors that influence the strengthening of democracy in general.

The baseline indicated strong support for democracy despite weak performance. But we cannot assume that democracy will continue by default. A significant share of the population is open to alternatives, such as “strong leaders” or “military rule”, even while they support democracy (Ref 1). So we need to find predictors of democratic strengthening.

What strengthens democracy?

Among the many factors debated in the literature on democratic consolidation, a general consensus exists around only three:

  • Income and wealth levels are positively correlated to democratic strengthening (Income inequality, however, is negatively correlated)
  • Economic growth is positively correlated to democratic strengthening
  • Literacy rates and education level are positively correlated to democratic strengthening

The combined positive influence of these factors was theorized in a famous 1959 paper by Seymour Martin Lipset. Lipset considered these factors inter-related and termed them together as “the economic development complex.” Subsequent cross-national studies have generally held these relationships as valid. (These are cited in the full report.)

The most recent survey of South Asia, in this vein, found that formal education is the single biggest factor in determining support for democracy. “In South Asia, someone with a graduate degree is seven times more likely to support democracy than is a nonliterate person” (Ref 1, 92).

Another strain of research focuses on cultural factors: History as a former British colony (as opposed to say, French colony) and penetration of the English language have been correlated with democratic viability. Diversity may also help, especially because minorities in any given area are stronger promoters of democracy.

Forces extraneous to South Asia may constrain region-wide democratic politics. The political environment of the neighborhood (e.g., China, Iran, Southeast Asia) affects longer-term democratic consolidation, due to both geopolitics and the so-called “contagion effect”. (The most famous example of this effect was in Eastern Europe, where the fall of communism in one country affected others almost like dominoes.)

In addition, we need to consider spillovers from international terrorism, American foreign policy, and, very significantly, climate change.

Next step

All these influences on democratic strengthening are derived from theory and past data, which are predictors but do not form a forecast. The next step is to organize these predictors to form a forecast, in which variables are prioritized by risk. In doing so, the next post will introduce relative certainties and uncertainties.

Note: I’m using these posts to summarize my lengthier analysis. The references below reflect only this summary.

Ref 1. deSouza, Peter R., Suhas Palshikar, and Yogendra Yadav. “The Democracy Barometers: Surveying South Asia.” Journal of Democracy 19/1 (January 2008): 84-96.

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I have completed the initial report on the future of democracy in South Asia, and submitted it to the Pardee Center. It will be reviewed by analysts and then discussed at a conference planned for the fall. Meanwhile, let me update you with highlights of the forecast. (And thank you for your earlier feedback; you are acknowledged in the report.)


I followed a four-step political risk forecasting process:

  1. Define baseline: What is the current state of democracy in South Asia?
  2. Detect first-order trends: What factors influence (drawing from theory) the strengthening of democracy in general?
  3. Identify certainties and uncertainties: Which of these factors are relatively certain to exist in fifty years? Which of these are uncertain?
  4. Construct scenarios: What are the likely combinations of the main certainties and uncertainties? What are the risks and implications?

In this post, I will highlight some aspects of the baseline that I constructed for the report. Later posts will discuss subsequent steps.

Baseline for Political Forecast

Democracy is common and understood well as a system. In the past fifty years, the common platform across South Asia has been a Westminster-style parliamentary system. Challenges to this, either presidential (in Pakistan, Sri Lanka, and Maldives), or military-autocratic (Bangladesh and Pakistan), or one-party rule (India and Maldives) have been temporary, which eventually gave way. Even monarchies (Nepal and Bhutan) have begun to move toward greater parliamentary legislation.

Governance is weak; political risks are high. The violation of civil and political liberties is widespread across the region. Corruption is common: South Asian countries have consistently ranked in the bottom half in the world’s corruption indices. Insurgency is significant: Af-Pak frontiers, Kashmir, Nepal, Sri Lanka (until recently), Bangladesh’s southeast, the Indian northeast, and more than a third of the rest of India. Terrorism has increased since the late 1990s. The states of South Asia have built large security forces, which makes civilian political leadership uncomfortable.

Political organization varies greatly. Political parties are organized to varying degrees of success, and often fall prey to cults of personality. Dynastic influence is high across the region. Most political parties are run in an authoritarian fashion. Some major parties are affiliated, directly or indirectly, with armed cadres to enforce strikes and carry out political violence.

Mass support for democracy is strong. Despite weak performance, citizens across South Asia voice strong support for democracy, according to most surveys conducted in the last two decades. The most recent region-wide survey shows that South Asians overwhelmingly favor the rule of “leaders elected by the people.” It reported that “For every one South Asian response that endorses dictatorship, there are six South Asian responses that prefer democracy” (deSouza et al 2008, 86). However, South Asians want to modify their democracy with stronger leadership, greater discipline, and greater respect for traditional values. This is an important point we will come back to at the end of the forecast.

Stay tuned for the next installment: first-order trends.

Cited reference: deSouza, Peter R., Suhas Palshikar, and Yogendra Yadav. “The Democracy Barometers: Surveying South Asia.” Journal of Democracy 19/1 (January 2008): 84-96. This paper summarizes the results of a large-N survey across South Asia.

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[Note: This post draws from my previous post, Future of Democracy in South Asia.]

Thank you everyone for a wonderful set of suggestions on the Future of Democracy in South Asia project. I thank I have an excellent set of variables and potential approaches. It’s time to begin categorizing these. Let me share some of my initial thoughts, based on your feedback.


I will take Martyna’s suggestion, and divide it into phases, because the outcome of the first phases will determine the path of the later years. But, for simplicity, I’ll keep it to two: the present till 2030, and then 2030-2060.

Relative Certainties

One of the key tasks in forecasting is to understand how past changes and continuities might translate into future uncertainties (and risks) and certainties. The foremost here is what Chris suggested: climate change. Past changes are relatively certain to have impact on migration, and put strain on, as Chris put it, “inclusive politics.” But the timeline of it is not certain yet … 30 years, 50 years, 100 years?

However, another change-related certainty is: food crisis. This will be due to the loss of arable land because of sea-level rise and/or himalayan glacial melting.

Continuity from the past, I think, will assure two other relative certainties: (1) increase in literacy levels. I think Lubna’s thesis is right on this (although I don’t know whether the education will be “secular” though; I think it will continue being more technical and less critical). (2) increase in per capita income across the region. Overall GDP, however, may get affected by the climate change situation.

Relative Uncertainties

The path of anything else other than these seems uncertain to me: size of army, nuclear weapon possession or even use, press freedom (Lubna’s point), human rights performance, external trade / GDP, ethno-nationalism (Denis’s point), terrorism, US role in the region (Murli’s point), or Middle East peace (Lubna’s point).

Of these, I think the path forward for ethno-nationalism is the most complex one to predict. Greater fragmentation might continue, because of regional/local collapses (e.g. warlordism), strains from climate change, reactions to terrorism, unequal economic growth (to wit: India’s northeast or the Naxalite insurgencies in its underbelly), or as a reaction to globalization.

On the other hand, common crises such as climate change or a limited nuclear war (heaven forbid) or common positive trends, such as region-wide economic growth and the establishment of a common market might reduce the political (not cultural) importance of ethnic groups.

Health improvements to me seemed a certainty at first. But sea-level rise and flooding could intensify the incidence of water-borne diseases.

I need to think more about the path of these trends, and the changes/continuities in specific actors that can affect these trends.

Cause-effect relationships

I like Martyna’s suggestion: first figure out, what do theories of democracy predict about the empirical cause-effect relationships, and then guess how the certainties and uncertainties might affect those relationships. The consolidation literature is indeterminate with regard to many of these variables, from trade, to terrorism, to economic growth. Some say they help strengthening of democracy and others say it is unclear. I’ll need to look more into this.

Lubna also makes a very interesting point that boundaries are bound to change anyway, so we might as well think about the region as a whole. (Makes it easier for me to rationalize the project.)

So, this is an initial attempt at categorizing some of the suggestions. Please let me know what other crucial variables I’m missing or anything else! Meanwhile, I’ll be doing some background research on some of these to provide the next iteration, so stay tuned.

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Affluent countries have become increasingly interested in softer, fluffier research. David Brooks wrote in the New York Times today that people are more interested in understanding things like happiness, trust, and security–but in ways that are meaningful rather than just by statistics. This shift is not easy though. Brooks writes:

[M]odern societies have developed vast institutions oriented around the things that are easy to count, not around the things that matter most. They have an affinity for material concerns and a primordial fear of moral and social ones.

The attempt anyhow is welcome news to me for two reasons. First, a good portion of my own research, taken from an angle known as social constructivism, makes a case for nuanced understanding of qualitative trends. And second, the areas of application I have worked in, especially in political risk assessment, there is no substitute for qualitative analysis.

To repeat: making the case is not easy. In one of my consulting projects at the United Nations, I heard frequently about a “quick and easy” risk assessment tool–basically an excel sheet–peddled by one of the big five consulting firms. Now there’s a certain structural elegance to assigning hard numbers off the top of your head to something like “potential for protest by opposition,” and then adding all the numbers up, and then concluding country X is riskier to operate than country Y.

But devising good strategy to mitigate risk always involves understanding thoroughly the uncertainties that make up risk. After all, if everything was binary or without uncertain nuances, there would little need to understand risk.

Moreover, in most cases, risk cannot be mitigated by wielding hard, blunt instruments, like simply throwing money or guns at a problem. And that holds even if the problem is something as hard and blunt as terrorism.

That’s why American strategy in reducing risk of terrorism now talks more about smart power and soft power and less about shock and awe. If hard power is about getting others to do what you want, soft power is getting others to want what you want. (This is the classic formulation by Joseph Nye, now Dean at the Harvard Kennedy School.)

Hard power, from Wall Street to Kabul, has been based on hard numbers. Soft power requires dissing out that excel sheet for some time and thinking in terms of narratives, of nuanced if-then statements. That can seem messy; it can seem like more humanities than sciences, but guess which power is more cost-effective and less risky as long term objective.

So, here’s to a softer, more holistic understanding of risk and reward.

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President Obama’s budget projects 1.3 trillion dollars in deficit in fiscal 2011. This has provoked a Republican outrage that I simply fail to understand. Here are the facts:

  • When President Bush came to power, America was in its 3rd consecutive year of budget surplus.
  • He cut taxes and went on a spending binge, with strong Republican support. He eventually spent more than any other president since LBJ, including nearly a trillion on the invasion of Iraq.
  • In the process, the Republicans used up the surplus so swiftly that America ran a large deficit 7 out of the 8 Bush years, consecutively since 2001.
  • They accelerated the hands-off policies started during the Clinton era, giving financiers the biggest say in a democracy, and ushering the biggest downturn since the Great Depression.
  • The administration spent another $868 billion on bailing out the financiers and providing stimuli before bowing out in 2008.

So after the “frat boy shipped out,” as The Economist put it, leaving America in a mess on multiple fronts, his supporters are now upset that the “socialist” Obama administration has to run another budget deficit?

This is the type of irresponsible amnesia on part of the Republicans and the Tea Party fanatics that’s going to hurt America’s global position.

And that’s what my article is about.  But I had to introduce the context, because another irresponsible refrain you hear from the right is that the rest of the world is just out to get America.

My question is, will the world continue to sponsor the debt that the United States has raked up? America’s “aura of invincibility,” wrote David Sanger in the New York Times, will last “maybe a long, long time.” While investors would malign any other economy under similar management, it shrugs off “American financial exceptionalism.” So the capital markets worried this week about Europe’s growing debt, but they hardly paid attention to Moody’s polite warning that America’s financial health “will at some point put pressure on [America’s] triple-A government bond rating.”

This optimism and this belief in exceptionalism is a dangerous consequence of the way US politicians allowed the development of a neo-laissez faire: Just borrow and spend, all will be fine in the end. You see that in consumer habits, in subprime markets, in Wall Street’s philosophy of heavy leverage, and in wanton federal spending while lowering taxes. Risk management was mostly rhetoric.

And so, the US government debt burden now is 85 percent of GDP. This is higher than the proportion in the “socialistic” Europe vilified by the American right. Germany: 79 percent, France: 77 percent, Portugal: 76 percent, Britain: 69 percent, and Ireland, which IMF claimed was the sickest of them all: 61 percent.

Still ok, if someone (read: China) is willing to underwrite the debt. China still holds the world’s highest share of US treasury bonds, almost $800 billion worth. But it has been buying less and less, signaling discomfort.

In the 1990s, Canada lost Moody’s triple A rating when its combined federal and provincial debt approached 100% of GDP. As the US inches to that level, a ratings blow may be nearer than most optimists believe.

And for America, that type of a blow will be more than economic. It will send a powerful political message about the overstretch of the world’s superpower. The world wants to believe that US politicians will be able to enact meaningful fiscal change, keeping its long term financial health squarely in sight. But so far, especially with the naysaying, amnesiac, and reactionary performance shown by the right, they will have little to find comforting.

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My book, India’s Open-Economy Policy: Globalism, Rivalry, Continuity (London and New York: Routledge, 2008 ) has been selected by Asia Policy as one of two dozen recommended books for its 2008 Policymakers Library. It was one of only two books on India. Needless to say, I am happy.

The link above will take you to Routledge’s site where you can preview the first chapter of the book. 

So what is it about? It’s easy to take India’s successful open-economy policy for granted now. But when the policy was initiated in 1991, its success was far from assured. The book explains why India’s open-economy policy has continued unabated despite widespread political risks. It draws implications for countries seeking to politically market grand or controversial ideas.

It’s about large-scale change management strategy, risk mitigation strategy, and the political marketing and cultural acceptability of economic policies.

The book also deals fairly comprehensively with China. A perception of rivalry with China and China’s success with open-door policy gave Indian policymakers an urgency to catch-up. The book shows how this urgency was marketed politically to defuse some of the policy risks arising from India’s fractious domestic politics.

In addition to the political marketing, Indian policymakers also had to establish the pro-market policies in a culture that was historically skeptical about capitalism. The book also points out how this transformation was accomplished by some maverick policymakers.

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To start with, my “G” doesn’t stand for globalization, it stands for the G-8, the leaders of the industrial powers, who are now meeting for their annual summit in Hokkaido, Japan.

They’re meeting in troubled times. The distributional issues of globalization–the fact that the benefits are shared extremely unequally–have finally come to the fore, especially now that consumers of the West are feeling the pinch from rising food and energy prices.

The public is in agreement about the inequality stemming from globalization. The Christian Science Monitor reports: “The majority of the public in 27 out of 34 countries surveyed said the benefits and burdens of economic change are not being shared fairly.”

The problem is not inequality per se. The problem is the global political risk associated with it. Expect electoral turbulence around the world, expect accelerated shifts in international relations, expect the Saudis and China to get more influence as the global role of the West comes under question.

In his Washington Post column, Jim Hoagland came down particularly hard: “The world that these leaders and their predecessors have promised for the past three decades is not today’s world of energy and food-price shocks, global financial irresponsibility, menacing climate change, and terrorist networks seeking weapons of mass destruction. The G-8 leaders — most of them disdained by their publics in these hard times — have failed, and they should accept responsibility.”

No wonder, then, that the UN Secretary General cautioned on the eve of the summit: “Never in recent memory has the global economy been under such stress.”

Some argue that the G-8 needs to be expanded to a G-20 to make the group more representative and thus assure better global management. Hoagland rightly suggests more focused economic management, centered around a G-3: US, EU, and Japan. But neither will be sufficient. The first will be impossible to manage; the other is out of touch with global shifts.

A forward-looking concept of economic management should balance representation, future outlook, and focused manageability. It’s time to think of a G-4: US, EU, China, and India. Fixing energy problems or financial excesses across borders, and battling climate change or global terrorists will all fail without the active involvement of the two most populous (and increasingly assertive) countries of the world.

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