This has not been a great year for geopolitical stability (though it is also easy to exaggerate how bad it’s been). Failing states in the Middle East, ongoing conflict in Iraq, Syria, Libya and Israel, war between Russia and Ukraine, geopolitical tensions in East Asia, and a worsening Ebola epidemic in West Africa have all caused investors to ratchet up their concerns about political risk.
Let me be blunt: I didn’t expect a lot of this to go down in this fashion. After all, I’ve been relatively upbeat about global economic governance, and I was hopeful that as the developed economies recovered, so would their ability to tamp down geopolitical tensions. Oops.
Chastened, I decided to revisit some of the available geopolitical risk reports that came out in the beginning of this year. I like to read these reports because they usually exaggerate risks that never come to pass. After the geopolitical annus horribilis of 2014, I was all set to acknowledge that they got it right and that maybe we should pay more attention to these kinds of assessments.
Well, after reading the World Economic Forum’s Global Risks 2014 report, I have decided that William Goldman’s maxim about Hollywood producers applies to geopolitical risks analysts: Nobody knows anything.
As Klaus Schwab explained in his preface to the report:
The report features an analysis of a survey of over 700 leaders and decision-makers from the World Economic Forum’s global multistakeholder community on 31 selected global risks. For the first time, survey respondents were asked directly to nominate their risks of highest concern.
So, how did they do? Um… not well:
Environmental risks, such as climate change, extreme weather events and water scarcity, have become more prominent since 2011, while health-related risks (pandemics and chronic disease) have become less so. Concern about geopolitical risks, such as global governance failure, has given way to concern about socio-economic risks such as income disparity, unemployment and fiscal crises (p. 17).
When asked to rank order risks, WEF respondents offered “fiscal crises in key economies” as their top-rated risk. Most of the geopolitical risks did not make the top 10.
What about the Eurasia Group, then? They published their top 10 risks for 2014, and did a somewhat better job than the WEF. Among their top risks, Eurasia did identify a capricious Kremlin and an aggressive China. But they also warned about “Al Qaeda 2.0,” which doesn’t really describe the Islamic State. Furthermore, aamong their “red herrings” — i.e., inflated or exaggerated risks — they said this about Syria:
Its neighbors will have bigger problems in 2014, but Syria itself is becoming much more predictable. The country’s nearly three-year civil war will persist, but there’s not a chance that Syria will become a larger global security or market risk this year.
Now I was able to access both of these reports online for free, so this might just be a case of getting what you pay for. And there are other geopolitical risk analysts that rely on more rigorous models and probably do a better job than, say, the WEF.
Still, when the world seems like an uncertain place and you’re looking for some guru to help explain what the world will look like in 2015, please remember: Nobody. Knows. Anything.