The Perils of Doing Business Across Borders

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Book review: Guide to Country Risk: How to identify, manage and mitigate the risks of doing business across borders, by Mina Toksöz. Economist Books, 2014. 288 pages. U$ 16,73 (paperback, amazon.com)

The return of the world's economic center to Asia (China was the world's largest economy until around 1870) has countless positive consequences. In addition to lifting hundreds of millions of people out of poverty in China and the neighboring region, growth in Asia has helped mitigate the effects of the financial crisis in 2008 around the world. Today, even with somewhat slower growth, China and India together are the key drivers of the global economy, and more than one hundred countries around the world have the Middle Kingdom as their most important trading partner.

At the same time, the renewed economic rise of Asia, along with unprecedented global connectedness, has led to the emergence of risks that virtually all businesses around the world are exposed to. Take North Korea: while an unpredictable hermit kingdom on the other side of the world would hardly have mattered much to Brazil's Embraer and Vale in the early 1990s, Kim Jong Un's nuclear overtures today have the potential to negatively affect geopolitical stability in China's neighborhood, a market both companies strongly depend on.

Yet country risk -- which explains the things that can go wrong when business is conducted across borders -- also seems to be on the rise in developed countries. The rise of xenophobia and nationalist politicians in Europe, Brexit and the election of Donald Trump generate important risks for investors and the global economy as a whole.

As Larry Summers recently wrote even before the election of Trump,

Even the possibility of Trump becoming President is dangerous. The economy is already growing at a sub-two percent rate in substantial part because of a lack of confidence in a weak world economy. A growing sense that a protectionist demagogue could soon become President of the United States would surely introduce great uncertainty at home and abroad. The resulting increase in risk premiums might well be enough to tip a fragile US economy into recession. And a concern that the US was becoming protectionists and isolationist could easily undermine confidence in many emerging markets and set off a financial crisis.

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For those interested in a detailed introduction to these themes, Mina Toksöz, former head of Country Risk at Standard Bank International, has written a detailed analysis that explains the many facets of political risk analysis. It includes excellent descriptions of regulatory risks (e.g., the increase in taxes on mining corporations in Australia and local content rules for oil exploration in Brazil), convertibility risks (i.e., making it difficult for businesses to repatriate their gains, as is the case in Venezuela), and domestic political risks, such as the ever more real possibility of Marine Le Pen winning the French presidency.

Toksöz makes clear that macro trends affect industries in different ways and often have unexpected consequences. The end of the commodity boom, for example, leads to massive layoffs in South Africa's mining sector, increasing the risks of social unrest, which in turn can lead to stronger support for populist leaders such as Julius Malema -- which, in turn, increases the risk of expropriations and a general decline in South Africa's business environment.

Contrary to many other books on international affairs or, more specifically, on risk analysis (like The Fat Tail, by Bremmer and Keat, reviewed here), Toksöz provides step-by-step instructions on how to assemble an actual model to assess country risk. This turns it much more into a hands-on guidebook for people working in the field than into an abstract discussion of international affairs for the interested non-specialist.

What is perhaps most striking about Tokzöz’s book is that, contrary to the current popular gloom about seemingly proliferating political upheaval, it lists many tangible initiatives that have sought to reduce risk factors for international investors. Global transparency standards are tougher today than ever before, and anti-corruption legislation makes prosecution easier -- as in Brazil, where post-9/11 banking laws helped the Federal Police uncover the largest corruption scheme in the country's history. But the author also worries about the troika's inability to handle the Greek crisis better, suggesting that future crises could damage Europe's economic system more profoundly. She also points out that, for political risk analysts, understanding the dynamics of supranational entities has become more important than ever.

The Guide to Country Risk is thus the ideal handbook for someone setting up a political risk analysis unit at a company, providing remarkably detailed advice on specifics like Political Risk Insurance (PRI) and a long list of interesting case studies from across the world.

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