GAVIN BRADSHAW: A case for the scientific analysis of political risk

It is unsurprising that the recent violence in KwaZulu-Natal and Gauteng concentrates the minds of SA's political and business leadership to ponder questions about the cost of doing business in the country. However, the events suggest we should grapple with the bigger question about the nature of political risk in the country.

It is perfectly natural that we ask ourselves questions regarding the costs and consequences of the recent political events, including the response to the insurrection, coming as it did during a lockdown in the face of the Covid-19 pandemic. But focusing on political risk allows us to better manage future events that may threaten socioeconomic life in the republic. 

This article aims to shed light on the nature of political risk, its significance for a country such as SA, and the importance of scientific analysis and reporting in this regard. I also make a case for a broader interpretation of the concept.

Political risk is widely regarded as the risk businesses face from various political sources. The notion is most commonly associated with countries of the developing world and emerging economies, though that is not exclusively the case. Risk may emanate from either internal or external sources, and it may relate either to government or to society more generally.

Internal risks may be associated with conflict, such as civil war or riots, or the expropriation and nationalisation of property. External risks may relate to international terrorism, warfare and other threats brought about by foreign governments, or the broader international or geopolitical environment.

Political risks that are associated with government commonly relate to the effect of government policy such as confiscatory or regulatory policies that make the operation of business difficult. It may also be associated with government corruption. Electoral and policy uncertainty may additionally present a form of political risk. Societal political risk relates to issues such as poverty, unemployment and low levels of trust, and other measures of social cohesion. 

The importance globally of political risk in the perceptions of corporate leadership has increased in recent years and is now considered to be one of the most important forms of risk. For instance, almost half of all companies now entirely avoid foreign direct investment because of political risk.

Though political risk cannot be eliminated, it can be managed; but effective management depends on accurate measurement, using the scientific tools that are available. This has never been more important than in the current, “post-truth” era of fake news. An oversupply of information means uncertainty and volatility often prevail, and the interconnectedness of world society supercharges the political risk environment.

The very availability of information creates a sense of information overload, and the importance of sound analysis has therefore never been greater. Contention about the Covid-19 pandemic illustrates the degree of disagreement over the source of the disease, and the preferred response to it, among other things. There is a clear need for dispassionate, analytical advice.

SA is now in a developmental phase that has been optimistically termed the “consolidation of democracy”.  Of course, this very terminology is contingent upon the successful completion of the phase. As I write, many of the signs point in the opposite direction — to the “hollowing out” of  democracy in fact.

As one looks at the sources of political risk it appears they all loom very large in our country. So, for instance, levels of conflict are high. Much of this relates to the dissatisfaction of the population, poverty and inequality, corruption and ongoing service delivery protests, xenophobia and race hatred. 

Periodically this breaks out in incidents such as the massacre at Marikana, xenophobic violence or the recent riots and looting in KwaZulu-Natal and Gauteng. But generalised, high levels of violence and destruction of poverty have become normalised.

In respect of policy, efforts towards expropriation and nationalisation, which further threaten social cohesion, are increasingly in favour.

Political risk can be ameliorated through risk analysis, of which there are a number of methods available. In general these are accurate, and scientifically well-founded. Based on analysis, economic actors may relocate their investments, their production, their jobs and so on, or they may procure insurance to ameliorate given political risks.

Political openness and democracy are important elements as they allow for peaceful public protest, sending messages to authorities to bring about change instead of allowing a build-up of dissatisfaction that results in violence and destruction. Strong political/bureaucratic institutions and robust civil society structures similarly provide resilience. 

Though research shows that many private sector entities do not now engage in formal political risk analysis, the need for a concentration on political risk analysis and communication has never been greater in SA.

Most current literature indicates political risk to be an issue of almost exclusive concern for business. The majority of risk-related articles appear in business or management publications, for instance. This seems obviously to be an overly narrow concern. Ordinary citizens are equally subject to the concerns of political risk. They are also investors, producers and consumers in their own right.

Indeed, a sound understanding of political risk may be of greater importance to ordinary citizens as they are precariously vulnerable to the exigencies of policy, governance and related threats. They are, generally speaking, also less able to respond to risk through relocation, disinvestment and insurance. A sound understanding of political risk at least enables the average citizen to make more informed decisions in respect of political and other life choices. It is therefore vitally important that we stimulate a conversation about political risk at this time.

• Prof Bradshaw is editor of the SA Journal of Political Risk and a research associate at Aeon, Nelson Mandela University. He writes in his personal capacity.