Archive for the ‘The Middle East’ Category

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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A lot of worry is making the rounds about “Political Islam.” Some of it is valid, some a function of what may be termed the unknown. But the extreme form of the worry, the one that gets inordinate media time, is nonsense. And as a basis for making policy, it is not just nonsense but downright dangerous.

It goes like this: the West should oppose Islamist parties from gaining power because even if they gain power electorally, they will break down democracy, like the Nazis did in 1932-33. The political risk, therefore, is so great that democracy itself can be opposed on principle.

This conception of political risk does disservice to proper analysis because it is not based on evidence and logic. It is based on prejudice. And that is something that all risk analysts should avoid.

I recently wrote an op-ed piece in The Huffington Post debunking this supposed political risk. Here are some excerpts from that:

For decades, Americans have been peddled a scenario with two scary arguments: Islamist electoral takeover is first of all very likely, and once victorious, Islamist parties would dismantle democracy altogether.

What has happened in reality is quite the opposite.

Across the world’s 47 Muslim-majority countries, 154 national elections were held between 1990 and 2006. Out of these, Islamist parties won only 12 elections.

If we only consider only those elections that were free and fair, that is, a reflection of popular will, then only three resulted in a victory by an Islamist party.

The specter that produces right-wing nightmares has been extremely rare.

What about the second part of the argument? Was democracy reversed in the three cases in which Islamist parties won fair and square?

Read more here to find out.

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In the past I’ve touched on the risk of urban unrest (e.g., here). Over the last two years I’ve seen that risk increasing around the world, even though some central banks asserted that the world is on an economic recovery and that the worst of the dangers have passed. That assertion, to me, felt like a sort of ostrich syndrome, by-product of a type of thinking that focuses most energy on economic growth and marginalizes the importance of politics.

Tunisia, Algeria, and today, Egypt are now examples of what I’ve been forecasting: urban political rebellions fueled by issues neglected by the economic status quo.

Tunisia’s Jasmine Revolution was sparked by a young man, Mohamed Bouazizi. He was unable to find a job in Tunisia’s stratified economy, in which a small elite governed with an iron fist, pursuing the philosophy that the government does not owe all that much economically to poorer citizens. He took to selling fruits and vegetables, and even in that, found himself having to pay bribes to corrupt officials. Enough was enough. He doused himself in gasoline and set himself alight. He also set alight a wave of rebellion–the Jasmine Revolution–that overthrew, within a month, a government that had ruled for more than 23 years.

In streets across Algeria, protests against high food prices, corruption, and unemployment have been gaining strength. The government has calculated that in order to survive it needs to accelerate a large public spending program to reduce popular grievances. It remains to be seen whether this suffices. The IMF has warned that to sustain this, Algeria’s economy would need to grow at least 6.5 percent a year.

In Egypt, economic conditions and Mubarak’s decades of sharp political repression have combined into street rebellions. It’s going on as I write: young protesters throwing stones and setting trucks ablaze, and riot police lobbing tear gas and charging the crowds with batons.

What was once a forecasted risk across the region is turning into reality.

One root of this, obviously, is the existence of repressive governments. The other two roots of the anger are the pursuit of conservative economics and the effects of Western foreign policy.

Neoclassical growth-focused economic policy has always discounted the political risks of globalization. In more places than ever before, national economic policy agendas are influenced primarily by a small segment of the financial community and its interests. In the US, Wall Street’s interest to maximize stockholder value has defined its general stance in favor of a small hands-off government. In conversations I’ve had with adherents of neoclassicalism, I’ve often been surprised to see how fanatically this interest is defended as uncompromisable, sacrificed or de-prioritized only at the peril of bringing down the economy.

In most developing countries, the capital market is not as thoroughly organized, nor able to exert such a continuous level of top-grade lobbying power. But the underlying philosophy recognizes growth as the core value. In this philosophy, globalization replaces development. The role of government is to create the conditions under which internal and external exchanges can take place fluently. It is an interest that serves first and foremost the investors and only then the broader public, if it trickles down at all. (Unless you believe in the grand myth that what’s good for investors in invariably good for the populace.)

The problem is not economic growth per se. Growth certainly is needed. The problem is setting Growth up on a pedestal, such that other national priorities are subsumed under it. And this is a world-scale issue. Never has trickle-down theory been so widely accepted within governments across the world. It is much more entrenched now than it was when Ronald Reagan and Margaret Thatcher pursued monetarism as a goal for Western economies. They had to face more vigorous intellectual and policy opposition than what monetarists face today. Neoclassical economics has become established by now not only in the US, but in emerging markets too as an accepted belief that no longer needs defense. (My book, India’s Open-Economy Policy, demonstrated how this ethic or value got entrenched in India in the last decade and a half.)

Promoting growth as value #1 has resulted in a severe neglect of food, healthcare, education, and social stability as direct policy arenas. Governments have taken a backseat in all, believing increasingly that the markets should take care of these. Surprisingly, the mortgage-securities-led recession did not dampen this sentiment. Government’s role here is restricted to performing a bail-out, and not any wider. Government role in food, healthcare, and education have come under fire as instances of big government, whether you consider the Tea Party rant in the US, or public employment in Algeria, or food and fuel subsidies in Jordan.

The political ramifications are stark. The pace of change in Tunisia, for example, has been breathtakingly rapid. As one stunned newspaper editor in Tunis remarked: “Its like night and day, black and white. The changes of the last week have been so huge and rapid, we think we are dreaming.”

America has chosen the right side with a pro-reform and pro-liberty stance in the region. Two aspects of the wider risk picture, however, remains the same. First, citing its security and energy interests, the US has historically suppored most of the Arab repressive regimes that are now in peril. And second, the US has, in the process, lost credibility on the Arab street. According to a 2010 Brookings Institute poll, only 16 percent of the Arab population is hopeful about America’s Middle East policy. In the past, Arab citizens used to dislike US policy but like Americans as a people. The trend has converged dangerously in recent years. A majority now sees both US policy and Americans unfavorably. It’s this majority that’s on the streets now, revolting.

So, we know that monolithic US-backed Arab states face greater political risk. But so does the United States. And mitigation of this particular risk will require a fundamental shift in US foreign policy. Will US policymakers overlook the profound ramifications here, as some Arab tyrants did, to serve narrower interests? Let’s hope not.

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