Economics and Security: Political Risk Analysis
IR427
University of Southern California
Spring 2016
Tuesdays, 5-7:50, VKC 202
Dr. Pamela K. Starr
Office: STO 99
Office Hours: Tu 2-4, Th 1-3, and by appt.
Office Phone: 213-740-4122
Email: pkstarr@usc.edu
Course Description and Content:
Governments have long understood the need to measure the relative risk of political instability
and opposition as a prerequisite to the formation and implementation of an effective foreign policy.
Multinational corporations with fixed investments overseas are also intimately familiar with the
importance of political risk analysis to the success of their business enterprises. Beginning in the late
20th century, the number of firms with foreign investments exploded while currency and bond traders
and equity investors dramatically expanded their operations in emerging markets. These developments
have broadened the recognition that politics can matter as much as economic fundamentals in
measuring the degree of risk associated with a particular investment.
This course will introduce students to the analysis of political risk. It will illuminate the different
aspects of political risk that affect the interests of governments and of equity and portfolio investors,
and how risk differs among countries and regions and varies over time. Students will learn different
methods for measuring political risk, apply these techniques to real world cases, and present the
findings of their risk analysis quantitatively and qualitatively. The ultimate objective of the course is to
provide students substantive knowledge and hands-on experience in assessing political risk in emerging
market economies and presenting this information in written form and through oral presentation.
Requirements:
Students are required to complete the assigned readings for each day prior to class and to
participate actively in class discussions and exercises. The instructor reserves the right to add additional
short readings on current events that illuminate the topic of any week’s discussion. In addition to the
weekly assigned readings, students are highly encouraged to read the Economist magazine each week.
Class discussions will draw on recent real world events in key emerging markets to exemplify the
concepts presented in the assigned readings. These discussions and class participation more broadly are
critical elements of the learning process for this course, and will account for 5% of the grade.
By the second week of class, students will be assigned to an emerging market country team from
the following list of countries: Brazil, China, India, Russia, South Africa, Thailand, and Turkey. The job of
“analyst” for the assigned country will include six separate tasks, or assignments.
First, students must write two short country reviews of current events and structural
characteristics related to stability in their assigned country. These will be based on country-specific
readings distributed by the instructor during the second week of class and are designed to jump-start
student research on their assigned country. The first review will concentrate on recent events, the
second will emphasize structural factors that are relevant to the relative degree of stability in the
country, and both will be detailed further in class.
Second, beginning in the fifth week of the semester (and immediately following the country
review assignment) student working on the same country will work as a group to write three weekly
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wikis (of about 300 words) analyzing a recent development in their country and explaining its impact on
political stability and risk. This assignment is designed to begin the process of analyzing how events in
your assigned country (recent and structural) affect stability. Details of this assignment will be provided
by the instructor separately.
Third, students will write three short reports or updates (800-1000 words) during the term
analyzing political risk in their country. These reports will push students to take the next step in risk
analysis – to construct a more extensive and theoretically informed analysis of key drivers of stability in
their assigned country. The precise content of these assignments will also be distributed separately.
Fourth, all students assigned the same country will work as a group to prepare a term project
that provides a more complete analysis of political risk in their country. The first task related to this
project is two separate country scoring exercises scheduled during the second half of the course. These
exercises will teach students how to develop a quantitative picture of stability in their country from the
mixture of quantitative and qualitative data they will have gathered.
Fifth and building on the information used in the scoring exercises, student teams will undertake
additional research on the drivers of stability and risk in their assigned country to develop a
comprehensive risk report for their country. The details of this capstone assignment will be distributed
separately, but broadly it must include a base case that identifies key downside risks and upside
potentials, an explanation of the drivers behind these risks and their likely impact on stability, three
probable scenarios for the future dictated by these risk factors, and the implications of this risk setting
for their “client”. The content and findings of this analysis will be presented as an extended essay (3000
words) preceded by a short, executive summary (250-300 words). This assignment MUST include
references AND a bibliography.
Sixth, the last two sessions of the course will be devoted to oral presentations by each country
team. These will clearly and succinctly present the main “takeaways” of the written report orally before
a client (represented by the instructor and the rest of the class) accompanied by a short but welldesigned power-point presentation.
Finally, there will be a traditional mid-term examination accounting for 20% of your grade.
Late Assignments:
All deadlines in this class are firm, just as they would be in the real world. A risk analyst who
constantly misses his/her deadlines is unlikely to remain employed for very long. So there will be strict
penalties for lateness in this course. Assignments will be downgraded 1/3 of a grade if they are more
than 5 minutes late; another 1/3 of a grade if they are not received by midnight, and another 1/3 of a
grade if they are not in the client’s (the instructor’s) inbox by 8am the next day. They will then be
graded down 1/3 of a grade for every additional day they are late. However, since the learning process
in this course is cumulative, it is ALWAYS better to turn in an assignment late, even very late, and
thereby have the opportunity to benefit from the instructor’s comments, than not at all.
Written Assignments:
Effective writing plays a central role in this course. You will write early and often; you will write
at different lengths and do so both individually and in groups just as you would in a real world risk firm.
As you write, keep in mind that does not matter how good your research and analysis might be if the
resulting argument is not communicated clearly and succinctly. If the client cannot easily understand
your conclusions about the relative degree stability in your country, your efforts will be of limited utility
and it will be unlikely that you and your firm will be retained for future research contracts. I thus highly
encourage you to carefully edit your work before you send it to the client (me). If it is not well-written, I
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will bounce it back to you with comments and a request to rewrite it. I also encourage you to read
George Orwell’s essay “Politics and the English Language” (found in the content section of the
blackboard page for this course) and carefully follow Orwell’s recommendations for clear writing. You
may also wish to visit the USC writing center for assistance with your written exposition.
https://dornsife.usc.edu/writingcenter/
Grading:
Country Reviews:
Wikis:
Country Updates:
Mid-term Examination:
Scoring Exercises
Final Paper:
Final Presentation:
Class Participation:
5%
5%
30% (10% each)
20%
5%
20%
10%
5%
Readings Recommended for Purchase:
Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic
Investing, Oxford University Press, 2009.
Greg Ip, The Little Book of Economics: How the Economy Works in the Real World, John Wiley &
Sons, Inc., 2010.
All other readings will be made available through web links, the USC library webpage, or on Blackboard.
Plagiarism and Academic Integrity
USC seeks to maintain an optimal learning environment. General principles of academic honesty include
the concept of respect for the intellectual property of others, the expectation that individual work will
be submitted unless otherwise allowed by an instructor, and the obligations both to protect one’s own
academic work from misuse by others as well as to avoid using another’s work as one’s own. All
students are expected to understand and abide by these principles. SCampus, the Student Guidebook,
contains the Student Conduct Code in Section 11.00, while the recommended sanctions are located at
http://scampus.usc.edu/university-governance. Students will be referred to the Office of Student
Judicial Affairs and Community Standards for further review, should there be any suspicion of academic
dishonesty. The review process can be found at http://www.usc.edu/student-affairs/SJACS
Disability Disclaimer
Students requesting academic accommodations based on disability are required to register with
Disability Services and Programs (DSP) each semester. A letter of verification for approved
accommodations can be obtained from DSP when adequate documentation is filed. Please be sure the
letter is delivered to me (or to TA) as early in the semester as possible. DSP is open Monday-Friday, 8:305:00. The office is in Student Union 301 and their phone number is (213) 740-0776.
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Course Reading List
January 12: Introduction
Mutual introductions and country selection among the following options: Brazil, China, India,
Russia, South Africa, Thailand, and Turkey.
January 19: What is risk and how do we deal with it?
Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic
Investing, Oxford University Press, 2009: chapter 1-2.
Examples of Risk Analysis:
Aon 2015 Political Map, www.aon.com/2015politicalriskmap/2015-Political-Risk-Map.pdf
Eurasia Group, GPRI, February 2014 (Bb)
Eurasia Group, Top Risks 2016, http://www.eurasiagroup.net/pages/top-risks-2016
Longview Global Advisers, The 2016 Global CEO Agenda: Slow growth, nagging risks,
December 2015 (Bb)
Emerging Market Adviser, Mexico: Cielito Lindo, 9 November 2015 (Bb).
Real world pitfalls and keys to success:
Sam Wilkin, “Four Experts Discuss the Science and Art of Country Analysis” in Sam Wilkin, ed.,
Country and Political Risk: Practical Insights for Global Finance, London: Risk Books, 2004: 127-145. (Bb)
Frameworks for Risk Analysis:
Ian Bremmer, “Managing Risk in an Unstable World”, Harvard Business Review, June 2005: 5160. (Bb)
Nassim Nicholas Taleb and Gregory F. Treverton, “The Calm Before the Storm: Why Volatility
Signals Stability, and Vice Versa”, Foreign Affairs, (January/February 2015): 86-95. (USC Libraries, Social
Sciences Full Text).
Inter-American Development Bank, The Politics of Policies, Economic and Social Progress in Latin
America, 2006 Report, Washington, DC 2005: Chapter 2 (focus on institutions) and pp. 130-137 (focus on
understanding the six key features of public policy).
January 26: Analyzing Politics and Policy-Making: Informal Rules and Societal Actors
(first country review due)
Informal Rules of Societal Behavior:
Mariano Grondona, “A Cultural Typology of Economic Development” in Lawrence Huntington
and Samuel Huntington, eds., Culture Matters: How Values Shape Human Progress, Basic Books, 2000:
pp. 44-55. (Bb)
“Socialization”. (Bb)
Framework for Societal Analysis:
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Jeffry Frieden, "Method of Analysis: Modern Political Economy” in Jeffry Frieden, Manuel Pastor Jr.,
and Michael Tomz, eds. Modern Political Economy and Latin America: Theory and Policy. Boulder, CO:
Westview Press, 2000: 35-43. (Bb)
Societal Actors:
Inter-American Development Bank, The Politics of Policies, Economic and Social Progress in Latin
America, 2006 Report, Washington, DC 2005: p. 25 and chapter 5.
Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic
Investing, Oxford University Press, 2009: chapter 5 (Domestic Instability).
National Intelligence Council, Global Trends 2030: Alternative Worlds, Washington, DC: US
Government Printing Office, December 2012. “Individual Empowerment” (pp. 8-14) and “Demographic
Patterns” (pp. 20-29). http://bit.ly/1ndXoi4
Case Studies:
Sabrina Tavernise, “Survey of Pakistan’s Young Predicts “Disaster” if Their Needs Aren’t Met”,
New York Times, 22 November 2009. (Bb)
Walter Molano, Emerging Market Adviser, BCP Securities: On ethnic divisions, “Ukraine”, 22 June
2015; on demography, “Overview: Learning Greek”, 20 July 2015; on human security, “Chile: Change of
Focus”, 16 June 2014; and on inequality, “China: The Wrong Model”, 21 November 2011. (Bb)
February 2: Analyzing Politics and Policy-Making: Political Institutions
(second country review due)
Inter-American Development Bank, The Politics of Policies, Economic and Social Progress in Latin
America, 2006 Report, Washington, DC 2005: chapters 3-4.
Recall Bremmer and Keat, pp. 94-99 (State Failure and Coups d’Etat).
Case Studies:
Walter Molano, Emerging Market Adviser, BCP Securities: on political institutions, “Peru: The
Morning After”, 26 October 2015 and “Pitfalls of Managed Democracies”, 6 October 2011, and on
corruption “An Air of Intolerance”, 15 October 2015 , and “Ukraine”, 22 June 2015 (from last week). (Bb)
ManattJones Global Strategies, “Mexico Political Update: Rule of Law, Governance and
Investment”, 7 January 2015. (Bb)
February 9: Geopolitics, Security and Risk
(Wiki 1 due)
Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic
Investing, Oxford University Press, 2009: chapter 3 (Geopolitics).
National Intelligence Council, Global Trends 2030: Alternative Worlds:
Executive summary (pp. i-xiv) and Introduction (pp. 1-5),
Chapter 1, “Mega-Trends”: REVIEW 8-14 and 20-29 and READ 15-19 and 30-37.
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Chapter 3, “Game-Changers”: In the “Wider Scope for Regional Instability” (pp. 70-82) READ the
section on the region in which your country is located, REVIEW the tables on pages 49 and 101, and
SKIM the rest of the chapter just to get the main idea. http://bit.ly/1ndXoi4
Eurasia Group, “Top 10 Risks for 2016” (review).
February 16: Understanding Markets
(Wiki 2 due)
Greg Ip, The Little Book of Economics: How the Economy Works in the Real World, John Wiley &
Sons, Inc., 2010.
It is highly recommended that you read the entire book, but you absolutely MUST READ
pp. 1-31; 45; 63; 65-119; 144; 148-162; 193-201; & 211-237.
Andrea Seebrook, “On Capitol Hill, Rand's 'Atlas' Can't Be Shrugged Off”, NPR, 14 November
2011. http://www.npr.org/2011/11/14/142245517/on-capitol-hill-rands-atlas-cant-be-shrugged-off
Tamara Keith, “Austrian School Economist Hayek Finds New Fans”, NPR, 15 November 2011.
http://www.npr.org/2011/11/15/142307737/austrian-school-economist-hayek-finds-new-fans
David Welna, “Keynes’ Consuming Ideas on Economic Intervention”, NPR, 16 November 2011.
http://www.npr.org/2011/11/16/142348310/keynes-consuming-ideas-on-economic-intervention
Walter Molano, Emerging Market Adviser, BCP Securities: On economic models, “Overview: In
Search of a New Model”, 1 February 2011; on state versus government failures, “Forbidden Fruit”, 1
December 2011, and on factors of production “Where in the I is AI?”, 17 August 2015. (Bb)
“The French Model”, Economist, 7 May 2009. (Bb)
Recommended:
“Why It's Illegal To Braid Hair Without A License,” NPR, October 15, 2014. An example of
government regulations as a market failure, and why they are so hard to correct. http://n.pr/1On53Bn
February 23: Markets, Globalization, and Risk
(Wiki 3 due)
Navan Chanda, “What is Globalization?”, YaleOnline, November 2002 and Globalization 101,
“What is Globalization”, Levin Institute. (Bb)
National Intelligence Council, Global Trends 2030: Alternative Worlds: “Crisis Prone Global
Economy” (pp. 43-50). (Same link as above)
Case Studies:
Walter Molano, Emerging Market Adviser, BCP Securities: on the implications of globalization
for the international economy, “The Dog that did not bark”, 26 April 2011, “The Perils of Globalization”,
3 October 2011, and 7 December 2015, It’s the Supply, Stupid; and on the structure of national economies
and a country’s resulting vulnerabilities to changes in the global economy, “Colombia: Chronic Dutch
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Disease”, 6 July 2015, “Philippines: No Longer Sick”, 5 December 2011, Uruguay: No Where to Hide”, 2
June 2014, and Peru: Limping Along”, 22 September 2014. (Bb)
March 1: Mid-Term Exam
March 8: Financial Markets and Risk
(First country update due)
Reread Greg Ip, The Little Book of Economics, chapter 15.
Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic
Investing, Oxford University Press, 2009: chapter 4 (Political Risk and Capital Markets).
Walter Molano, Emerging Market Adviser, BCP Securities, 4 January 2016, “Overview: What Lies
Before Us.
Case Studies, Latin America:
Pamela Starr, “The Politics of Exchange Rate Management in Mexico and Argentina, 1994-1995”, in
P. Oxhorn and P. Starr, eds. Markets and Democracy in Latin America: Conflict or Convergence? (Boulder,
CO: Lynne Rienner, 1999): 203-238. (Bb)
Walter Molano, Emerging Market Adviser, BCP Securities: “Ecuador: Worn Around the Edges”, 8
September 2015, “Overview: Size Matters”, 5 October 2015, “Overview: Fiscal Vulnerabilities in Latin
America”, 27 October 2014, and reread “Colombia: Chronic Dutch Disease”, 6 July 2015 (from Feb. 23).
(Bb)
Case Study: The Greek Debt Crisis
Vlogbrothers, “The Debt Crisis Explained in Four Minutes”.
http://www.youtube.com/watch?v=mEVqeaFHsHE
Adam Davidson and Chana Joffe-Walt, “Debt Crisis Follows Greece Getting a Second Look”,
National Public Radio, Morning Edition, 14 May 2010.
http://www.npr.org/templates/story/story.php?storyId=126821407
Bill Marsh, “It’s all Connected: An Overview of the Euro Crisis”, New York Times.
http://www.nytimes.com/interactive/2011/10/23/sunday-review/an-overview-of-the-eurocrisis.html?ref=greece Review all six schematics.
Highly Recommended:
“The Invention of Money”, This American Life, 9 January 2010.
http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money
March 15: Spring Break
March 22: Scoring Macro Political Risk: Exercise I
(Second country update due)
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Stanley H. Kaplan, “Making an Educated Guess” in Samantha Ettus, The experts guide to 100
things everyone should know how to do, Clarkson/Potter Publishers. (Bb)
Handouts on Scoring Risk. (Bb)
Individual Country Readings/Research to prepare for exercise.
March 29: Foreign Direct Investment and Risk
Going Global, “Understanding Foreign Direct Investment”. http://www.goingglobal.com/articles/understanding_foreign_direct_investment.htm
Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic
Investing, Oxford University Press, 2009: chapter 7 (Expropriation).
Jo Jakobsen, “Old problems remain, new ones crop up: Political risk in the 21st century”, Kelly
School of Business case study, HBS Publishing, 2010. (Bb)
Ilan Alon and Theodore Herbert, “A stranger in a strange land: Micro political risk and the
multinational firm”, Kelly School of Business case study, HBS Publishing, 2008. Pp. 127-130 & 135
(sections 1,2,3 & 6). Focus on difference between macro and micro risk factors. (Bb)
April 5: Scenario Building (and Managing PowerPoint)
(Third country update due)
Lawrence Wilkinson, “How to Build Scenarios”, Wired Magazine, 2009.
http://www.wired.com/wired/scenarios/build.html
Handout on Scenario Planning. (Bb)
Examples of scenario planning:
“Shell Global Energy Scenarios to 2050” (Bb).
National Intelligence Council, Global Trends 2030: Alternative Worlds, Washington, DC: US
Government Printing Office, December 2012. Page 56 and Chapter 3, “Alternative Worlds” (pp. 107133). http://bit.ly/1ndXoi4
April 12: Scoring Macro Political Risk: Exercise II
April 19-26: Student Presentations
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