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Secure And Insecure Countries. In Light Of Egypt. An Open Thread.

By Dan Harris on Posted in China Business

I am always amazed and impressed and yet also somewhat skeptical of the courage of my firm’s clients. Right after the fall of communism in Russia, we represented a whole slew of companies going into Russia’s Far East, mostly in an effort to capture its natural resources of timber, fish and metals. I would ask them about political risks and their reaction would typically be something along the lines of how there’s is a risky business to begin with.

I can also remember a couple of times where our clients walked away from what looked like great deals because of political risk concerns. One was a deal in Guinea-Bissau. Our client had been asked to take over a company that had been appropriated by the government. The profits were there, but in the end, our client said “no” because of fears that once he built up the company, his company too would be subject to appropriation. I have another client, a very successful manufacturer, who refuses to locate in any country without a strong and functioning democracy. He views even Malaysia and the Philippines too risky due to their religious disputes. Not surprisingly, however, his is a high-end, high margin business so he can easily afford to be choosy. We have another client in the resource business who loves high risk countries because those tend to have less competition and higher margins. He views getting kicked out or having to leave on a short notice as “just a cost of doing business.”

But how is political risk measured? And do businesspeople, particularly those with SMEs really even have a clue.  I mean, three months ago, were any of you predicting Egypt would blow so soon?  And how do you determine your own political risk?  And which countries are risky and which are not? Are countries like China and Vietnam really as low risk as they seem? Comments are even more strongly encouraged on this one than usual (if that is even possible). Please, let us hear from you. 

  • Mike

    As much as I would like to believe that China is as stable as it seems to be (because I’m here and would not want to have to leave, knock wood), it would be foolish to think that anywhere is guaranteed stable. Matter of time. Empires come and go, always have, always will.
    Even if it is not popular revolt, a big natural disaster is enough to change everything. But then again, twenty, thirty years on it will all be different again too regardless.
    Better not forget to carpe-diem while the carping is good…!
    I would not write-off Egypt just yet either — with 24h coverage of CNN it looks wild west and end of days, but one or two years from now, tops, all will be forgotten and there’ll be business again as usual.

  • Jack

    I’m not even a Malaysian but how can you (or your ill-informed source) even compare Malaysia and Philippines ?
    They are miles apart in socio-economic development, governance, transparency, infrastructure, security and overall climate to do business.
    And what is their ‘religious dispute’ ??
    Back on subject:
    Keep bread on the table and the promise (then deliver – year-on-year as China has done) of a better future for the majority of the population.
    That alone is what gives governments legitimacy, regardless of the ‘isms or other technical items.

  • Eric

    No place is really stable. I remember hearing some crazy statistic that only 7 countries did not have their governments change through violence in the 20th century, although I never verified it. Even without violence, governments can change easily radically enough to wipe out ones’ business or net worth. This even happens in “stable” western democracies — look at FDR’s government stealing all physical gold (so much for safety!) in the USA or the winner-takes-all parliamentary elections in European-style systems. Any place is only three days from collapse if the food supply stops for whatever reason. Although not really human nature, we need to try to live with uncertainty and tail events.
    Also, your clients sound extremely interesting. Is the resources “just a cost of doing business” gentleman hiring? I have a finance and energy trading background; currently well-employed, just looking for something different.

  • Mohhamed Ishkar

    Dan, a question, please. Have you ever been to Egypt, or it’s religious equivalent in China (Xinjiang)?

  • Anon

    Just FYI–WEF’s 2011 Global Risk Report is a really interesting read… Same with the Eurasia Group’s report. It almost seems like it’s not really safe to be anywhere right now. Re Egypt, I keep hearing that, for those who had their eyes open and a little bit of common sense, Mubarak’s days have been numbered for a long time now, or should I say, it was only a matter of time. Perhaps that’s what Mr. Ishkar is getting at. Interesting that Secretary Clinton gave a speech so soon before urging leaders in the region to reform or else face demise… When it comes to outlooks on global political risks, my sense is that people–especially those with vested interests in whichever area, in both the public and private sectors–really just see what they want to see and then explain around that. Cognitive dissonance is a powerful force…
    Re China, I’ve always been fascinated by big foreign companies that almost seem to be staking their futures (if not futures, then at least billions and billions of dollars) almost without hesitation on what seems like a long-term pro-China geopolitical bet. Sometimes these bets seem to rest on little more than the size of the Chinese population. Perhaps they’ve forgotten that only once in CCP history has the party had a peaceful leadership transition. Does the country’s new-found wealth and global influence make it more or less likely that peaceful and predictable leadership transitions will be the norm? Hard to say. The process appears to have been more formally institutionalized, but how genuinely institutionalized is it if the Party itself is the final arbiter of the process? Even more basically, how many people really understand how it happens, as opposed to just when it happens? How many of the CEOs who have staked their companies’ futures on “long-term, cooperative relationships” with SOEs in the last three or four years really understand/stood the shifting politics of SOE governance, particularly during a period of leadership transition? These were all far more risky endeavors than most observers give them credit for. Ten years can turn a visionary to a madman. So far, the bet seems to have paid off, but my sense is that some have really gotten themselves deeply embroiled in a system that they do not fully understand and, even if they eventually do understand it, will never really be able to gain access to it in any genuinely meaningful way. I wish I could just fast-forward to see how it ends up, but I guess that would take the fun out of it all…

  • Anon

    Just realized that I may have come off sounding like I was accusing you of not having your eyes open or not having common sense. Not what I meant at all. I meant that this wasn’t necessarily a big surprise for most people who have been closely following developments in Egypt in recent years….Sorry about that. Poorly chosen words.

  • neil

    Well, it’s a good reason not to buy property in emerging markets. You can easily lose everything overnight.

  • Twofish

    Risk is not something that you measure, but rather something that you describe. You can pretty easily figure out when things are going to blow up when you just talk to random people and then figure out how annoyed they are.
    Also things that look like massive risks in the newspapers may not look like such big risks to people that do business. For example, what’s going on in Egypt is pretty important, but if we have a few months of political instability followed back to moving to the “new normal”, then it’s really not going to adversely affect the bottom line of any business that does business there. In fact if the new government is popular and pro-economic growth this could be good for foreign businesses. Personally, I’m looking at Egypt and thinking that now is the perfect time to buy.
    Similarly with China. I don’t expect anything similar to what is going on in Egypt to happen in the next two months. However, personally, I think it’s likely that something similar will happen in China in the next two decades. But if when and it does happen, and you have a massive uprising followed by either a change in government or a crackdown, then I really don’t see whoever is in charge doing much that to destroy foreign investment.
    Anon: Perhaps they’ve forgotten that only once in CCP history has the party had a peaceful leadership transition. Does the country’s new-found wealth and global influence make it more or less likely that peaceful and predictable leadership transitions will be the norm?
    Don’t know. But it doesn’t go so bad that you lose everything, it doesn’t matter much to a foreign investor. And if it does get bad enough so that China blows up, then there is really nowhere in the world to hide.
    Anon: How many of the CEOs who have staked their companies’ futures on “long-term, cooperative relationships” with SOEs in the last three or four years really understand/stood the shifting politics of SOE governance, particularly during a period of leadership transition?
    Surprisingly large numbers do. One reason that “princelings” get hired as consultants by foreign corporations is to give an inside view on Chinese politics. Also, the thing about a large corporation is that you can afford to bet tens of billions of dollars and if you lose, then it won’t kill you. I can’t think of any Chinese partnership right now that will drive the US partner to bankruptcy if it fails.
    Anon: These were all far more risky endeavors than most observers give them credit for.
    Sure, but then you have to consider the risks of doing nothing.
    Anon: The process appears to have been more formally institutionalized, but how genuinely institutionalized is it if the Party itself is the final arbiter of the process?
    The Party is not a single person, and part of the point of institutionalizing succession is to be able to have an organized mechanism so that you don’t have internal fights within the Party. The basic goal over the last few decades is to make the Party more than the individuals within in. The fact that the baton was passed from Jiang Zemin to Hu Jintao a few years ago means that you don’t have the problem that have in Egypt with the a President in his 80′s. It also means that if you had something seriously bad happen in China, that the Party could “sacrifice” Hu Jintao, move the new guy in a year or two early and stay in power.
    Anon: Even more basically, how many people really understand how it happens, as opposed to just when it happens?
    The number of people that follow Chinese politics isn’t that small. It’s a lot less transparent than US politics, but it’s not that unpredictable.
    Anon: So far, the bet seems to have paid off, but my sense is that some have really gotten themselves deeply embroiled in a system that they do not fully understand and, even if they eventually do understand it, will never really be able to gain access to it in any genuinely meaningful way.
    I don’t think that Hu Jintao fully understands the Chinese government or economy. One of the things that you need to deal with in business is that you don’t have full knowledge and if you try to wait until you get full knowledge, nothing will get done.
    As far as access, the purpose of a for-profit is to make money not necessarily to make friends. As long as you end up making some money in China, it really doesn’t matter if you have access or not or if you can “meaningfully” change the system. One refreshing thing about business is that you don’t expect people to be “nice” to you. The Chinese government is letting foreign businesses invest because it believes that it’s to their advantage to do so. The second people think that it will be to their advantage to stab you in the back, you’ll find a knife there. I don’t think that anyone is under any illusions about this.

  • Aaron

    I’m pretty sure that no one can really predict any singular revolution. But generally, many revolutions are simply “inevitable”.
    In that Egypt was inevitable. It was just a matter of when, and not if.
    China is drastically different. Chinese revolutions are historically driven by angers within the rural farming communities, not from the urban centers. Mao and the CCP learned that lesson very well.
    Today, while China is suffering a lot of problems, the rural areas are not heavily impacted by them. Rural Chinese are benefitting from inflation prices on food and produce and even cotton, as well as heavy central government subsidy and aid and development projects in rural China. Speculations in the Chinese real estate market has not impacted many rural Chinese. Slow down in Chinese manufacturing actually shifted much of the development back to the Chinese countryside.
    Rural Chinese do suffer from famous land grab cases, and they are generally in the low income tier of China. But there are concerted efforts by the central government to deal with these problems. (And they have the cash to throw around).
    -
    In terms of calculating political risk, you calculate where the volcano will blow, not where the lava currently flow.
    For example, in Egypt, if you are doing business there, it would not be difficult to gauge where the progressive stands on labor and employment issues.
    Similarly, in China, you know enough to know that you don’t want your shop in China to be like Foxconn.
    Why? In case China does have mass protests, 2 things might happen:
    (1) a New government will come in, and enforce laws that will put you out of business because of your past practices.
    (2) the old regime will try to hold on, and use your past practices as scapegoat to blame for all their problems.
    Either way, you have to be nice to the People, not just to the government. (Yes, the government might let you get away with offering the bare minimum wages and LONG work hours. But do you really want to push it?)
    Even in US, recall BP (yeah, they might not have been technically at fault for their shotty oil rig operations, but it didn’t matter once they make the headlines. They become the sacrificial lamb for the politicians. That’s political risk of standing on the edge of the laws).

  • Andeli

    There are number of idelogical factors holding the Chinese State together but the strongest one is the idea of China as a nation. The CCP has invested all of this energy and might in creating a sense of nationhood within its people and cultural sphere, This nation has been defined in opposition to foreign nations and China’s own history before 1911. The nation of China and the CCP are in the mentality of most Chinese one and the same. Combined this idea of a nation with the notion of unity and size being the measurement for historical greatness and you have grounds for holding a people together. If those who deviate can be stigmatised as being against the state even if they just oppose the party, then you a powerful weapon.
    The last succesful rural revolution China had was in 1368, so I am not sure that is where the dangers are coming from. The biggest danger is unemployment among the younger generations living in the cities. That was also the trigger in Egypt and will be in the rest of the Middle East. Massive youth unemployment is like nitroglycerin in any socity. That why the Chinese government is reluctante to appreciate the RMB and every year pour trillions of newly printed RMB into fixed asset investments. Still the new Chinese youth is feeded, clothed and carried over every obstacle in life by their parents or family so they are not evolutionary at heart.
    The CCP will never fail in creating a peaceful transition of power. Since Mao it has been an unspoken rule within the system that no one seeks to utilize the masses for own political gains. Power struggles witin the CCP stay within the CCP. My fear is not a revolution but a long slow economical decline do to lack of reforms within the judicial system, economical system and political system. Still that better then violence.