Why the Business of Risk Is Booming

When the Soviet Union collapsed approximately a generation ago, there was great rejoicing in much of the world. But among those expressing caution were mathematicians and scientists.

Not because they harbored any illusions about the salutary effects of the old system, but because they understood that an order based on two competing factors was inherently more stable than one that had fractured.

While many have no doubt benefited from that cataclysmic change, those concerns have turned out to be prescient. Ironically, Russia and the US now face similar challenges: despite their relative military and - to a lesser degree for Russia - their economic might,  neither is sufficient any longer to overawe the forces of disruption.

In the meanwhile, the expansion of global commerce and the enhanced interactivity enabled by widely available and increasingly powerful technology has only enhanced the ability of increasingly smaller effects to create ever larger impacts. Supply chains, interrelated webs of communication and value trading have served to emphasize the importance of those co-evolutionary links just as instability has weakened them. As the following article explains, the result is that the ability to identify, assess and manage geo-economic risk has never been more important - or more difficult. JL

Phillip Stephens reports in the Financial Times:

Unwinding — of the assumption that economic interdependence would soften national competition and that global supply chains would beget more effective global governance
The west has a new industry. It is the booming business of calculating geopolitical risk. Glance around the world at the fires burning in the Middle East, at Russia’s march into Ukraine and the tensions in East Asia fuelled by China’s rise, and it is easy to see why. These conflicts and collisions are more than an unhappy coincidence. The end of history has made way for the era of systemic disorder.Sitting in the other day at a conference organised by two leading think-tanks — Aspen Italia and Chatham House — it occurred to me that when historians cast around for a title for the present chapter in global affairs, they might do worse than opt for “the great unwinding”. The backdrop for the gathering of business leaders and policy makers was the glorious tranquillity of Venice. The talk was about the ruptures that have brought down the post-cold war order.
The optimism in the west that greeted the collapse of communism was rooted in a clutch of organising assumptions. The world has become a more dangerous and unpredictable place during the intervening 25 years because most of these suppositions have now unwound.
The first was the permanence of the Pax Americana. Remember the breathless commentary about the impregnable hegemony of the US? At the turn of the millennium Washington assumed, and most experts concurred, that the sole superpower would set the terms of international relations for most of the 21st century. There would be adjustments to accommodate the new powers, but the US would continue to act as guarantor of the peace.
The historians no doubt will debate when precisely the illusion was shattered. The chaos that followed shock and awe in Iraq is a good a point as any. The wars in Afghanistan and Iraq ultimately drew the limits of US power, and did so just at the moment that China, India and the rest were rising fast. The war on terror did more than delineate the shortcomings of military might. Abu Ghraib and Guantánamo shattered the notion that America would always act as a benign hegemon.

US declinism can be overdone. In an excellent new essay asking Is the American Century Over?, the Harvard scholar Joseph Nye points up America’s enduring strengths — economic, demographic and geographic as well as military. It is also salutary to note how quickly the shale revolution has overturned many predictions of ebbing US power. What is true, though, is that the US of the 21st century is unlikely to possess the capacity or the will to shape the geopolitical order in the way it did in the 20th. For all the noise now being made by Republicans in Congress, future presidents will be obliged to follow President Barack Obama in recognising the constraints of a multipolar world.

The second unwinding has been in Europe. The creation of the euro was intended to complete the work of the EU’s founding fathers, replacing the deep scars of competing nationalisms with a postmodern model of deep integration. Europe’s borders had been fixed in perpetuity and the continent had said goodbye to war.

If the Europeans are having second thoughts about postmodern integration, most of the rising powers never signed up to the idea

The thought, too, was that Europe’s postwar model would be exported, first to the EU’s neighbours in the east and then as a template for the rising world. For a while it worked: a procession of once-communist states queuing to join the democratic club testified to the potency of normative power. There was something to be said for playing Venus to America’s Mars.

And now? The euro has been exposed as a half-finished project, a statement of intent that lacks vital political and economic underpinnings. Even after the crisis of recent years, and I am still not convinced Greece can remain in the euro, governments are reluctant to pool sufficient sovereignty to assure the single currency’s long-term future. The resurgence of nationalism is not confined to arguments about debt and deficits. Populists of left and right have prospered across Europe by demanding governments slam the door against the alleged depredations of globalisation.

There lies the third unwinding — of the assumption that economic interdependence would soften national competition and that global supply chains would beget more effective global governance. Instead we have seen the return of nationalist competition, in Russian President Vladimir Putin’s revanchism, and in the territorial disputes between China and its neighbours in the East and China seas.

If the Europeans are having second thoughts about postmodern integration, most of the rising — and in Russia’s case, declining — powers never signed up to the idea of sharing national sovereignty. The threat in the Middle East and parts of Africa comes from collapsing states; in Asia it is rooted in competition between states.
So how should business respond to this increase in political risk? Many still choose to ignore it: they worry instead about competitors’ pricing, economic growth and regulation. Investors in, and exporters to, Russia have learnt that complacency can carry a cost.
As they operate their multi-nation supply chains and just-in-time production processes, businesses should understand that the world has changed. The cold war era was dangerous but stable. The great unwinding has created a world that is dangerously unpredictable. If there is money to be made in calculating geopolitical risk, there is money to be saved in understanding it.