Accuracy requires careful attention to the legal, cultural, and social variations among societies, and constant monitoring of developments. It also requires a skepticalóand often contrarianóframe of mind.
Last December, when Carlos Salinas passed the presidential sash to Ernesto Zedillo in Mexico City, Salinas and his country seemed to he on a roll. Within a few weeks, however, the peso lost half its value; within a few months, Salinas was forced into exile in the United States.
Foreign businesses, governments, and investors were caught off guard, in large measure because of shortcomings in the way they evaluate political risk. The investment community, accustomed to the readily commensurable world of economic values, tends to equate quantification with objectivity. Political phenomena seldom lend themselves to quantification. To circumvent this problem, analysts ask country specialists to rate political factors on a numerical scale. This makes quantification possible, but, ironically, only by averaging subjective evaluations. In the context of widespread wishful thinking, reinforced by a desire to avoid being seen as gadflies, such indices of sentiment actually blind decision makers to serious risks.
In assessing risk, one can distinguish between social factors that, like different grades of fuel, determine the potential for conflagration, and political factors that can either reduce such risks or spark them. Two primary social factors in emerging societies are cultural (ethnic and religious) conflicts, and conflicts over the distribution of wealth and income. Though most emerging societies suffer from highly unequal distributions of wealth, the situation is most acute in Latin America, where the distribution correlates heavily with ethnicity.
Political factors determine whether these stresses arc resolved or intensified. Leading components are:
Elections. These can help defuse tensions by allowing for peaceful change. But elections must be credible, and they must result in legislatures that reflect the composition of the electorate. That is essential in countries with sharp social and ethnic divides. Winner-take-all elections accentuate tensions, as in Haiti. Proportional representation, guaranteeing everyone a seat at the table, can help heal divisions, as in South Africa.
Checks and balances on executive power. Representation is beside the point unless the legislature has real power, making it a forum for give-and-take among major segments of society. Emerging markets, with their dysfunctional social structuresótiny upper classes, modest middle classes, and poor majoritiesóhave a tendency toward authoritarianism, a tendency reinforced in Latin America by adoption of the United States' presidential model of government. The English-speaking Caribbean, with its parliamentary form of government, has generally been a model of stability. A similar pattern holds worldwide. In emerging societies in which democracy has not yet struck a deep root, the most resilient form of government seems to be a parliamentary system with a nonpartisan president or constitutional monarch.
The rule of law versus impunity. One of the greatest threats to political stability is impunityóallowing individuals or institutions to be above the law. In Latin America the tradition of allowing the army to remain "outside" the law lives on in military-imposed amnesties for murder of civilians. Though said to be necessary to heal divisions, the amnesties in fact keep old wounds festering and continue to undermine respect for the law.
Degree of militarization of society. When armies behave as police forces, they intensify ethnic and religious animosities, as in Algeria and East Timor. When labor unions and organizing efforts of the poor are attacked, insurgency may be their only recourse. It is therefore important to distinguish between armies used for defense from external aggression and those used for repression. In most of Latin America, armies almost exclusively serve the latter. Costa Rica, the only Latin-American country that has been spared an insurgency, abolished its army forty-six years ago.
Addressing basic needs. Only democracies can safety abolish armies. But authoritarian and democratic governments alike can secure the allegiance of poor majorities by investing in education, sanitation, and basic health care. Cuba and Costa Rica, with highly literate populations and life expectancies comparable to the United States, are both stable.
These are but some of the factors that determine political risk abroad. Though not quantifiable, most of these points can be analyzed with precision. Accuracy requires careful attention to the legal, cultural, and social variations among societies, and constant monitoring of developments. It also requires a skepticalóand often contrarianóframe of mind.
Right now, for instance, Chile has replaced Mexico as the darling of the financial community. Its economic indicators are strong, but its political indicators cry for caution. Though elected in a landslide, President Eduardo Frei does not even control the police, who answer to a general accused of concealing the involvement of subordinates in the murder of political opponents. In June, General Augusto Pinochet, the former dictator who still commands the armed forces, defied both the president and the supreme court by refusing to turn over a general convicted of ordering an assassination in Washington. Given the importance of the rule of law to market economics and political stability, developments in Santiago bear close watching.
©Andrew Reding and WorldBusiness