Political Risk Models the Recent

Political Risk Models

The recent volatility in the Middle East, which shifted the dynamism and optimism of an Arab Spring into the potential conflagration and destructiveness of an Arab Winter, has refocused attention on political risk in nations around the globe. Political risk is not an end to itself, but rather a component of a larger analytic framework from which policy makers, CEO's, and governmental institutions conduct due diligence on potential investment, public works, peacekeeping, and philanthropic undertakings.

Political risk is most closely associated with nation states which have authoritarian regimes, closed economies, or government institutions implementing policies curtailing economic, political, and social freedom. In observing nations for potential investments: public or private; the critical question is to what extent will invested capital be safe given underlying tension in political, social, and economic institutions.

Political risk has always played a part in investment decisions however; its weighting has often depended on the relative certainty of other analytic elements: "economic policy risk, economic structure risk and liquidity risk" (Economist Intelligence Unit. N.D. PP. 1). Investments in uncertain political or economic environments depend on a forecast of the potential for substantive changes in intra-state stability. As such the recent Arab State uprisings have brought a wave of instability to governmental institutions and consequently have increased the risk premium.

Middle East- Egypt

The transitional governments resulting from the recent Arab Spring provide a window of analysis on the changing landscape of political risk and investment opportunities. Egypt for example, stepped out of the Arab Spring in 2010/2011 with lofty expectations and a perceived low level of political and economic risk; "the IMF had predicted in the spring one percent economic growth for 2011 in Egypt and a quick recovery" (Chalamish, E.N.D. PP. 1). Further, the transitional government put in place after the removal of Hosni Mubarek indicated "Political stability allows businesses to be confident that the economic policies that attracted them to invest in Egypt will remain in place" (Chalamish, E.N.D. PP. 1). Yet with the recent wave of anti-American protests can these statements be integrated into a compelling narrative for long-term investment? Specifically, the answer is derived from qualifying the political risk variables associated with respective nation-states.

Risk Variables

While a plethora of political risk models exist, there are definitive items which comprise their ability to predict relative political turbulence. These factors include:

The threat of war, social unrest, disorderly transfers of power, political violence, international disputes, regime changes, institutional ineffectiveness, quality of the bureaucracy, the transparency and fairness of the political system, and levels of corruption and crime. (Economist Intelligence Unit. N.D. PP. 1)