The Issue-based Approach to Monitoring Political Risk

Given the diversity of countries to monitor, this article introduces a generic method for political risk intelligence that can easily be customized to a client’s needs. Defined as the issue-based approach, it mediates between the macro-level of assessing the main categories of political risk and the micro-level analysis of political power networks. The issue-based approach is particularly suited to monitor critical developments in a country over a longer period of time. Moreover, it enables the observer to make substantiated forecasts with respect to likely conflict scenarios.

The strategic dimension of political risk intelligence

The basic idea of the issue-based approach is derived from the client’s requirements, and limited time available to breaking down complex country analysis. In order to draw useful conclusions, many advisors only have a couple of minutes to make their case. Being selective and focused in setting priorities, really is a central aspect of the issue-based approach.

As discussed in previous articles on Global Risk Affairs, individual countries give foreign organizations quite specific reasons to be concerned. In the traditional understanding, political risks comprise: expropriation, currency inconvertibility and transfer restrictions, political violence, breach of contract and discriminatory regulation, and non-honoring of sovereign financial obligations. These categories of assessment refer to the macro-level. The micro-level of political risk analysis circumscribes the power and influence of personal networks in the target country, in particular those between politics and business, that can have an adverse effect on foreign interests. The micro-dimension also concerns the local level of decision-making, including relevant social organizations.

Neither the macro- nor the micro-perspective fully cover the strategic dimension of political risk intelligence, which is better served by the issue-based approach. Issues are the subcategories of the macro-types of political risk mentioned above. At the same time, the concept of issues connects to the micro-level of personal relationships involving diverging interests. Apart from bridging between the macro and the micro-level, the issue-based approach has two additional advantages.

Firstly, issues are concrete matters of dispute. One can learn about the most virulent political risks of a country by analyzing the issues, which have the potential to evolve into serious disputes. Secondly, the issue-based approach is a dynamic one because it focuses on the actors and their strategic behavior that will eventually determine a cooperative or a confrontational outcome of the disputed issue.

The conflict scenario for Bahrain becoming reality

View the following case of Bahrain, the small but interesting Gulf state, and one of the countries in the MENA region which are currently in political turmoil. Note, that the analysis on which the table below is based was already prepared in 2008. Requested was the development of a monitoring scheme for continuously judging political and economic reform perspectives in Bahrain. For that purpose, the most relevant issues were defined. The issue of the future relationship between the ruling Sunnite minority and the Shiite population majority was placed at the top of the list.*

For each issue one can imagine extreme behavioral scenarios of either conflict or cooperation between the stakeholders. The stakeholders are those actors who yield the resources crucial for determining the actual outcome. For diligent observers of the domestic scene in Bahrain it was obvious that despite a “Western” orientation and a liberal image presented to the outside world, the al-Khalifa monarchy actually remained a family autocracy, using nepotism and oppression to keep ultimate control of power. Due to biased elections to a mock parliament (October 2010) combined with a crackdown on Shiite protesters (since August 2010), fueling popular anger, the likelihood of the conflict scenario had already increased dramatically, before it recently became reality.

Table: Political Risk  and Reform Perspectives in Bahrain (July 2008)

Political risk issues Cooperation scenario Conflict scenario
Relationship between the ruling Sunnite minority and Shiite majority Stepwise political inclusion and representation of Shiites Increasing discrimination and reoccurrence of violent riots
Regime by autocratic monarchy Controlled liberalization of the governmental regime Restriction of civil liberties and political repression
Economic and social diversification motivated by the limited oil and gas reserves Development of public finance, the building sector and tourism; labor market reforms Social conflicts due to unemployment, inflation and protests of migrant workers
Iran crisis and US Naval base Moderation and political solutions in the Gulf region Dispute about US base following attack on Iran
Integration of the Gulf Cooperation Council Expansion of the common market including monetary union Tensions due to diverging relations with the US


Cooperative or non-cooperative behavior

Issue-based intelligence searches for significant cooperative or non-cooperative moves by the stakeholders which serve as signals as to what future outcome might be more likely. Think of set theory. All people’s behavior regarding a controversial issue belong mainly either to a set of cooperative moves or to a set of non-cooperative moves. Non-cooperative moves span from denying cooperation to actively seeking confrontation. If the moves have been mixed within a certain period of time, one can still come to an approximate judgment as to whether the set of non-cooperative moves is larger or smaller than the set of cooperative moves. Going one step further, one can evaluate the current state and likely outcome of a political risk issue by assessing the ratio of non-cooperative versus cooperative moves. If that ratio exceeds a critical threshold, the risk of a conflict scenario will approach certainty.

The issue-based approach to evaluating conflict risk scenarios also allows for interdependencies between various issues. However, one needs to know whether the causal relationship between the issues is positive (e.g. cooperative moves regarding one issue will also support a cooperative scenario for a related issue), or negative (e.g. cooperative moves regarding one issue will support conflict scenario for a related issue).

A short guideline

Depending on the assignment, it makes sense to focus on the three to five most relevant political risk issues (interdependent issues can be combined, if suitable). The next step is to think about what would be the most cooperative outcome (e.g. a dispute settlement) and what would be the most confrontational outcome (e.g. conflict escalation). These outcomes are the extreme reference scenarios. Then, one needs to identify the influential stakeholders. These actors are usually leaders of the government and opposition, including politically connected business executives or representatives of pressure groups. External actors such as representatives of neighboring countries, regional and greater powers, or international organizations, are also on the watch list regarding international political risk issues.

Moreover, taking note of possible divisions within groups and organizations is key to understanding stakeholders’ behavior. Within a government there may be officials who favor cooperative moves and others who are prone to non-cooperative moves. The same kind of differentiation might be necessary when analyzing the behavior of external actors. In order to add the dynamic moment to issued-based intelligence, one must account for change in the ratio between a non-cooperative and cooperative set of moves. Finally, these insights will enable the political risk expert to give a forecast of how the issues concerned might play out in the near future.

*The author thanks Doreen Storbeck for providing country expertise in 2008.