I have long held heretical views about political risk analysis, which cluster around what I call the “plumber’s test”. However bejeweled or slick at marketing a political risk firm may be, what matters in the end is that they are analytically correct.
Just as I don’t invite back my local plumber if he fails to fix the pipes, nor should businesses put up with political risk firms which missed the war in Iraq’s predictable outcome, were unable to see the coming of the Lehman crisis, or (more recently) failed to predict the Brexit vote. What holds for my plumber ought to hold for what I do for a living as well.
And yet, astoundingly, for all the million-dollar research departments in the City, and of all the major political risk firms out there, mine is the only one I know of to correctly call the Brexit vote. As far back as my prediction column for City A.M. in January 2016, we said Brexit would happen, to the general amusement of the commentariat and my competitors. Yet it is not an accident when the pipes are correctly fixed.
The main problem with Brexit political risk analysis revolved around the Pauline Kael fallacy. The legendary cinema critic of the leftish New York Times supposedly went wandering around, following Richard Nixon’s landslide 49 state victory in 1972, wondering how it was possible the incumbent won when everyone she knew voted for the hapless Democrat George McGovern.
There we have it in a nutshell. Top political risk analysts are always part of the elite they are supposed to assess. They go to the same cocktail parties, read the same books, inter-marry and share the same “right thinking” views, all without wondering over-much about the wider world outside the cocoon of conferences at nice hotels. Intellectually trapped within an elite they are supposed to objectively analyse, political risk analysts have not covered themselves in glory recently.
Instead, both analysts and their clients have been shocked over and over again, a singular illustration of their lack of understanding of our changing world. They were gob-smacked by the recent Colombian vote against the Farc peace deal, just as they lapsed into incredulous, petulant rage over Brexit.
Like the mad, perpetually oblivious Roman Emperor Nero fiddling while Rome burned, gormless analysts seem somehow still unaware that – following on from the disastrous Iraq war and the equally calamitous Lehman crisis – most average humans simply don’t trust western elites anymore.
This is a tragedy on many levels. For after 500 plus years, the new world we are living in will not be dominated by a western ordering power. Following on from the Dutch, British, and American eras of hegemony, we are now entering a time when a rising Asia increasingly matters and where the West no longer calls all the shots. This means the study of international relations is now truly global, and not just about what happens in Europe or North America. Political risk analysts that keep up with this sea change will do their clients a world of good.
Likewise, we are moving from the bipolar checkers game of US-Soviet great power competition to the far more complicated chess match of an era of many powers, where multiple interactions must be assessed. Standard international relations theory holds that such a complicated world is more dangerous, as there are simply more chances for great power miscalculation, and thus great power war.
On the other hand, there are more commercial opportunities in such a complicated place, if only political risk analysis can guide businesses to see the myriad glittering opportunities on the global chessboard. This world in transition means that there has never been a better or more lucrative time for political risk analysts to get their act together.
This article appears in October's edition of Money magazine, which is distributed free with the paper on Thursday 27 October.