Revolution and Risk

Egyptian crowd celebrating

A pro-democracy revolt terminated Egyptian President Muhammad Hosni Sayyid Mubarak’s 30-year rule of the country in early February. The transition of power has been felt by businesses all over the world and has other authoritarian rulers in the Middle East reassessing their strategies.

Roger Kashlak, Ph.D., a professor of international business and author of several international management textbooks who has worked in over 70 countries and on all continents except Antarctica analyzes the current events in the Middle East and the potential effects on international businesses and surrounding countries:

Since the 1978 Camp David Accord, the United States has supported Egypt with significant financial aid.  In 1981, when Hosni Mubarak assumed leadership in Egypt, ignoring the longer-term implications of political risk, the United States government began a policy of turning a blind eye to President Mubarak’s internal policies and subsequently empowering him. In fact, a member of that administration recently referred to Mubarak and the United States as “good friends.”  We were not. We were opportunistic friends. Egypt has been a stable and strategic partner in a volatile Middle East during the three decades of President Mubarak’s heavy-handed rule.  Similarly, the U.S. government has embraced other autocrats without thinking of future political risk implications that arise with changes of leadership or governments in host countries. We looked the other way with Ferdinand Marcos’ atrocities in the Philippines. When he was deposed in 1986, and replaced by Corazon Aquino, we lost strategic influence as well as tangible government and private investment. Loss of investment is a real risk in Egypt when the current political shake-out is resolved.

While Egypt has been compared to Iran, particularly because the Shah was overthrown 32 years to the date that President Mubarak left office, the political risk scenario is different. Religious influences were – and still are -integral in Iran’s upheaval; and when religion is introduced into politics, it adds yet another variable into the political risk equation and thus increases uncertainty, or variance about what we expect. Even though the main source of uncertainty in Egypt is the change of leadership due to social unrest, there is a possibility that religious influences in a new government may eventually add to Middle East risk especially when considering future relations with Israel.

On the heels of Egypt is Libya. As with Egypt, Iran, and The Philippines, there must be an embarrassment in Washington and other world capitals in regards to looking away from the self-serving, socially terrible actions of its leader because of dependence on Libyan oil. In effect, we helped to create the risky situation that is currently playing out in that African country and spreading to other oil-producing nations. As many of the cable news shows are focusing daily on the rising prices of gasoline, they are ignoring the larger issue. The political risk of Libya will be felt worldwide as costs of energy, production and transportation increase, and in many industries, these costs will translate to higher prices for consumers.

Political risk is not deterministic. It’s stochastic as it has a randomness that is difficult to predict because of the intersection of so many internal country-level policies and social implications of those policies, a host country’s corruption and lack of transparency, other countries’ short-term greed and strategic interests in a particular host country, and extreme religious influences. American businesses concerned with profit optimization must think about the amount of uncertainty – both short-term and in the long-run - involved in any country before committing resources there. As uncertainty, or variance increases, businesses must use additional resources to hedge against the implied political risk. And once again, this begets an upward pressure on costs.

Finally, we have the growing influence of China on African and Middle East countries currently undergoing political upheaval. Another totalitarian government readying for a leadership change after Hu Jintao steps down next year, to whom we have sold our financial soul, adds yet another dynamic factor to an already uncertain environment.  Stay tuned!