Geopolitical risks are posing an increasing threat to the global economy, according to the 2018 update of the Cambridge global risk index, which shows a rise of 16 per cent year-on-year thanks to the increasing likelihoods of civil conflict, interstate war, terrorism and social unrest.
The risk index, which was put together by the Cambridge Centre for Risk Studies and used as the basis for the Lloyds city risk index published in June 2018, measures the gross domestic product at risk (GDP@Risk) of 279 cities across the world from 22 threats in the five categories of financial, economics and trade; geopolitics and security; health and humanity; natural catastrophe and climate; and technology and space. Together, the cities generate 41 per cent of global gross domestic product.
The largest individual threats globallyare market crash (calculated at a potential $103 bn) and interstate conflict ($80 bn), with man-made threats accounting for 59 per cent of the total GDP@Risk.
Instability the key to increasing risks
Professor Daniel Ralph, Academic Director of Cambridge Centre for Risk Studies, said: “One of the most prominent features of the index is the worldwide rise in geopolitical risk, driven in large part by the threat of interstate conflict and civil unrest. We are likely to see this trend continue on a global level.”
According to the updated index, the geopolitics and security risk category has grown more rapidly than the other threat categories and by nearly 40 per cent since 2015. More than half of that increase is due to greater instability on a global scale, with threats to international trade agreements, the US presidential election and the UK Brexit vote all contributing to the mix, as well as the recent foreign and trade policy changes in the US and populist challenges to the established political parties across Europe.
What are the main threats?
The findings of the Cambridge index are mirrored in Cause for concern? The top 10 risks to the global economy, a report published by the Economist Intelligence Unit (EIU) in 2018, which names the top risks as a prolonged fall in major stock markets, a stepping up of US protectionist policies, territorial disputes in the South China Sea, a surge in global growth, major cyber-attacks, a downturn in China, military confrontation on the Korean Peninsula, proxy conflicts in the Middle East, a breakdown in the OPEC deal to curb oil production and multiple countries withdrawing from the euro zone.
The potential impact of changes to policy in the US is also covered in Borders vs. barriers, navigating uncertainty in the US business environment, a report by Zurich Insurance. Its survey of 500 chief financial officers across 30 countries found that they were bullish on doing business in the US, mainly due to a positive economic outlook and tax reform. However, the survey results also indicated that the respondents were concerned about US policies that might restrict the flow of goods, capital, and people.
While the threat and impact of US protectionist policies may be the main headline grabbers at the moment, they serve as a reminder that companies need to prepare for all geopolitical risks by looking at how they connect with the global economy and the way any changes within it may affect them.
Facing down today and tomorrow’s geopolitical risks
The authors of the Zurich Insurance report recommend that companies consider how a variety of future scenarios may impact their ability to do business in any part of the world and develop a more strategic approach to understanding geopolitical change. This involves defining a holistic geostrategy, including bold scenario planning, to successfully navigate through periods of geopolitical uncertainty – to manage geopolitical risks, not be managed by them.
Based on their recommendations, risk managers should first assess their organisation’s global footprint and consider its strategic goals within that context. Second, companies should invest in knowledge and networks, calling on external expertise as needed. The constant availability of news and information and the increasing likelihood of misinformation campaigns around the world make an experienced geopolitical perspective critical. Third, organisations must act, building flexibility and resiliency, monitoring risks proactively and constantly challenging their corporate cultures.
Risk managers can help their organisations consider geopolitics in their business strategy by using scenario planning and horizon scanning, making preparations and engaging with stakeholders and policymakers on local and national levels. They can also look into the potential option of shifting operations to seize opportunities offered by global changes.
While it may seem that geopolitics covers such a wide range of uncertainty in order to make any sort of risk management achievable, the development of the Cambridge Global Risk Index shows that the unpredictable can in fact be predicted in terms of its likelihood and impact, even on a global scale. By understanding and integrating geopolitics into their strategic planning, business leaders supported by proactive risk management professionals will be less at the mercy of unfolding events and better equipped to manage and even benefit from them.