Political Risk Analysis

Popular insurrection in countries long considered safe havens for Western companies, coupled with U.S. government efforts to curb overseas bribery in the past year, have sharply boosted the fortunes of a new breed of consulting firm. The growth field is political risk forecasting and its specialists are offering the world's largest corporations an often times quixotic blend of subjective information and facile speculation, quantified and packaged as valuable business intelligence.

"The time has passed when American businessmen can rely on the old friend in the [host] government to help them along: the cousin of the Shah or the nephew of Somoza aren't going to be able to guarantee the security of corporate assets anymore," argues Stephen Blank of the New York-based Conference Board, a leading business research organization. "American businessmen used to be the boys in the boat," adds Blank. "As things stand now, they can't be sure the U.S. government is going to row." While many would argue that Blank overstates the case for the decline of multinational influence in shaping governmental policies at home and overseas, his observations strike at the heart of the fears that political risk analysts are parlaying into a boom industry.

Political risk analysis is certainly nothing new in the world of corporate decision-making. For many years, major corporations have consciously attempted to include informal, impressionistic evaluations of political climates in making investment .decisions. What is new, however, is the growth of the independent specialists attempting to monitor a wide range of economic, political, and cultural factors in countries throughout the world, and then reduce them to sets of comparative evaluations.

Although the entire field shares certain basic operating assumptions, not surprisingly, a whole series of competing schools has sprung up, and risk analysts are quick to criticize their competitors in the quest for a piece of the action. Most offer an annual series of brief evaluations of host country political climates at subscription rates ranging from $500 to $1500 per year. Some will offer to supplement the basic service by providing much more detailed, long-term analysis, tailored to the needs of a particular overseas corporate investment: Here, fees may reach $30-$40,000 per study.

The first political risk index, still recognized as the leader in the field, is Frederick T. Haner's Business Environmental Risk Index (BERI). Haner, a former business professor at the University of Delaware, evaluates countries on the basis of ten separate factors, including such considerations as the dispersal of power among different political parties, fractionalization by language and ethnic groups, the balance of payment position, and potential for border conflicts. Outside panels of experts judge a country on each factor, and assessments on all ten criteria are reduced to a single overall political risk number between 1 and 100. The United States has always ranked as the safest investment climate on BERI's scale, having hovered around the 80-mark for the past five years. Singapore also rates high, with a score of 73. Argentina and Brazil earn marks of 53, and a 1980 update places Iran and Pakistan in the 20- to-30 range.

Newer members of the profession have called Haner's index too refined, and have stopped short of such detailed quantitative evaluations, ranking countries in political risk categories instead. Often, in their attempts to one-up each other in the originality and breadth of their analyses, firms will supplement these categorical evaluations with descriptive discussions of the country's political climate based upon what are presented as anthropological, sociological, and historical insights. Others have recently begun to stress the primacy of religious factors. Probe International, for instance, points with particular foreboding to the revolutionizing/politicizing impact of "liberation theology" in the predominantly Catholic societies of Latin America and of Islamic Fundamentalism in the Middle East and Southwest Asia. The game is never done; in their quests for a niche in the market, some offer in-depth character analyses of leading political figures and essays on local terrorists_ psychology.

In spite of the continually growing market, many in the business and academic communities are skeptical about the value of the services. Analysts are quick to tout the perceptiveness and sophistication of their offerings-"What the American businessman needs is a little bit of subtlety and caution in bargaining with foreign governments," says Howard Johnson of Arthur D. Little's political risk project. But, as the criticism goes, much of what the firms offer appears pedestrian, information readily available from newspapers. "Cambodia is in desperate need of foreign aid," stresses Toronto-based Global Outlook in its March report. In its special "crossnational study" on kidnapping and international business, the report assesses the usefulness of executive protection agencies, venturing "it seems reasonable to assume- that a person not protected would be an easier target than one surrounded by five armed men." Benjamin Weiner of Probe, International boasts that his firm uncovered a "slip-up in hiring procedures" at a U.S. company's Irish subsidiary, in which an all-Protestant team of foremen supervised an all-Catholic floor of workers.

This practice of dressing up banalities as brilliant insight may, however, be the most harmless aspect of the industry. In the race to gather and refine information, many of these firms may be relying on inadequate or faulty information that distort their analyses. Reliance upon highly quantitative approaches, draws particular criticism. "The more scientific you become," comments Samuel Hayden, managing director of the Council of the Americas, "the more quantitative you have to be. Many of the factors risk analysts are considering simply can't be quantified." And, as others point out, lurking behind the professional mystique of complex sets of tables and standard deviations is often the most elementary arithmetic. For example, Haner arrives at his final numerical index by simply adding together the country's scores on each of ten variables, with no attempt to determine the complex way in which his ten variables interact with one another. "The trouble with Haner's index," points out David Heenan of the University of Hawaii, "is that it assumes a sort of statistical uni-dimensionality. Political risk in a country is a gestalt of political and social factors. You have to use a much more multi-varied approach."

Even more troubling than the way in which political risk consultants analyze the information they collect is the way they gather it in the first place. "Country specialists" rarely have recent first-hand experience in the country of "expertise" when they make their evaluations. Professional travel is reserved for the consulting firm presidents. Although boasting a unique sense of the social climate of a country, they often rely primarily on "old friends" at corporate subsidiaries based there and seldom do they speak the local language. The typical visit to Indonesia might consist of a weekend stopover in Djakarta that includes visits to a string of embassies, a briefing from a local accountant and, schedule permitting, a ride in a public bus. One Washington, D.C. consultant who worked on a political risk project on South Africa, says he never left his -own library, utilizing the weekly journal and the local phone call to produce what he acknowledges as a "well-educated guess."

Not surprisingly, risk analysts generally share the enthusiasm of most major corporations for investment in repressive societies where host governments prize "labor discipline" as an absolute value. Thus, on most analysts' scales, countries such as Singapore, South Korea, South Africa and the Philippines rate as very good risks. One suspects that in spite of recent events in Iran and Nicaragua, most fail to look cautiously at the long-term implications of order maintained by the rule of force. "As long as torture is used efficiently and strategically, then we don't predict any problems," comments one consultant from Global Outlook.

At bottom, most of the criticisms ate not lost on many of the multinational executives whose companies throw down thousands of dollars a year for a growing array of services. 'They purchase risk analyses not because they view the information provided as gospel, but because they hope it may somewhere contain a tip for avoiding . disaster. Most executives interviewed do not believe the consulting services can do any damage to their business operations. In investment decisions, "their services are supportive rather than directive," observes David Allers, professor at Cornell University Business School. "No serious business would make an investment decision exclusively on the basis of one of the company forecasts," concurs Chet Di Mauro of United Technologies' international marketing division.

In spite of its drawbacks, the industry appears destined for further growth, as consulting firms respond to existing demand and, more importantly, do their best to create new demand. Profiting from insecurity, the firms can expect boom times in periods of increased Third World social unrest. It remains an open question however, how much the political risk analysts may in the long-run contribute to the very turmoil on which they depend for business by offering inaccurate advice to their investor customers.