Political Risk Analysis

Why is political risk analysis necessary?

The progressive loss of control over the effects of economic and financial decisions and initiatives with regard to foreign markets, caused by the continually increasing complexity of international operations and, particularly, by the growing interdependence between economic and political variables (to say nothing of the ever increasing weight of these last), renders it both indispensable and urgent to attempt through the use of scientifically reliable techniques to evaluate the negative effects, caused by political events, of such decisions and initiatives. Political risk analyses respond to this need and aim at minimizing such effects. Making decisions in conditions of uncertainty is in fact a difficult endeavor. And yet it is just this that happens when one operates in foreign markets. Usually, risk analyses by country do not attribute importance to the fact that the political system of a country is the mutable environment of its economic system. Political risk analyses, on the other hand, take this fact (together with factors of a different nature) into consideration; they attribute more importance to single events, and they take an interest in distributive events (who wins and who loses). At times - and this too is of indubitable importance - political risk analyses through the use of political indicators are able to flag certain market tendencies and opportunities that economic indicators pick up more slowly. In either case, political risk analyses aim at highlighting the importance that political structures and processes have over major strategic decisions, including those of economic nature.