Political Risk is Both Local & Global Now: Understanding Political Economy Matters

For a long time, political risk was defined as the probability that a political move – by a government, policy regulator, administrative entity, or active participants in the political system, read political parties and their representatives – would impact or affect private businesses and investors.

That definition is no longer valid now, in today’s volatile, fragmented world where geopolitics is back with a bang and being weaponised via geoeconomics, governments are aggressively reshaping businesses and markets with wide-spread industrial policies, and the post-Cold War “Davos consensus” of promoting globalisation and free markets is fraying.

A whole host of “political actors” beyond the conventional definition, such as cyber terrorists, regional and local officials and digitally empowered citizens, have now emerged on the scene, and are actively involved in shaping or impacting the narratives and choices around public policy, which has a direct bearing on business fortunes and outcomes.

Political risk beyond emerging markets

It was widely accepted, across both private and public sectors, that political risk is something companies, shareholders, bondholders and other participants in the capitalist ecosystem needed to grapple with in emerging markets only – countries lacking robust institutions and norms to uphold sanctity of contracts, rule of law, etc.

No more. In the past decade, political risk became mainstream across several leading developed countries as well, as reflected in seismic events such as the UK’s referendum in 2016 – commonly known as “Brexit” – to exit from the European Union, and the election of Donald Trump as the president of the United States in 2016 and 2024.

Long-held business assumptions around maturity of institutions, predictability of policy, and an overall sense of consistency and continuity spanning different political regimes, in advanced markets are cracking rapidly.

The political centre is broken

Be it US, Germany, UK, France and several other leading developed countries, the mainstream political centre is facing an existential challenge. The rise of populism and nationalism in these societies, as highlighted by ascending far-right, conservative political movements such as Make America Great Again (“MAGA”) in the US and Alternative for Germany (AfD), underscores the inability of the mainstream polity to address their people’s aspirations and challenges.

Large swathes of the middle class, battling a cost-of-living crisis and fearing for their economic survival in the globalised marketplace, are embracing politicians who advocate a more insular, nationalistic policy approach – one that de-emphasises global integration, free flow of goods and services, and instead, aims to localise factors of production.

The new political economy 

Consequently, the political economy worldwide is undergoing a transformation of the kind we have not seen in at least 25 years. The heydays of globalisation are well behind us now, and companies need to brace themselves for an era of fragmentation, less integration, and more volatility.

In a bid to outcompete their radical, extreme counterparts, and survive politically, the establishment in many countries is increasingly abandoning the idea of free markets, unhindered flow of goods and services, and human talent mobility via immigration.

Instead, the state is asserting itself to steer and control the “commanding heights” of the economy, pressing and pushing the private sector to align accordingly. This growing trend is manifest in the form of large-scale industrial policy across industries / sectors – be it semiconductors, defence, manufacturing, or green technologies.

New risk vectors

This generational churn in both national politics and geopolitics, as well as in the political economy, has significant consequences for companies and investors with diversified, international footprint.

That’s not all. Businesses now also have to grapple with an expanding array of “political actors” whose interventions have a material bearing on their reputation, operations, and more. These include the civil society, tech-savvy citizens and collectives and terrorists.

All of this calls for an agile, responsive playbook that helps companies and investors proactively anticipate, track and analyse the political economy and emerging political risks, and craft mitigating mechanisms to manage these risks and associated uncertainties effectively.

One thing is for certain: if you don’t make understanding political economy your business, then politics will run your business.