The Transnational Dimension in Political Risk Analysis
Raffaele Marchetti (LUISS)
Mattia Vitale (ENI)
31/08/13
Preliminary draft
Paper to be presented at the annual SISP conference, Florence, Sept 2013-08-31
1
Abstract
The purpose of this paper is to introduce a new model of analysis that – taking into
consideration current concepts of political risk and modern theories of globalization –
integrates in a comprehensive framework the more traditional variables of political risk with
a new transnational variable.
Political Risk Analysis (PRA) is the analytical discipline that tries to create a reasonable
framework of information on the risk profile for enterprises operating and investing in
foreign countries. Political Risk Analysis, by its very own definition, focuses on non –
commercial risks, that is, risks arising from the socio – political environment of a given
Country.
The concept of political risk and the analysis methodology adopted and used in PRA are
extremely heterogeneous, varying profoundly case by case. However a common pattern can
be identified. In almost every definition or operational concept of political risk, the focus
relies almost entirely on the internal dimension. The models developed by both public and
private agencies and institutions tend in fact to base their models on variables and indicators
internal to the country object of the analysis.
In our opinion this approach is limited. In today’s globalized and ever changing world, we
think that in any political risk analysis model it is fundamental to include a transnational
perspective. A transnational variable should accordingly be crafted in order to complement
the national variable by weighting the effects of the international and global dimension on
local and national socio-political events.
Sommario
State of the Art in Political Risk Analysis ............................................................................................. 3
The concept of political risk ................................................................................................................ 4
Globalization: a new paradigm. .......................................................................................................... 9
A new model of political risk analysis: the transnational variable ................................................... 13
Conclusions ....................................................................................................................................... 18
Bibliography ...................................................................................................................................... 19
2
State of the Art in Political Risk Analysis
The discipline of Political Risk Analysis (PRA) is often seen as a component of the broader
discipline of Country Risk Analysis (CRA). CRA began to be developed after the end of the
second world war and the affirmation in the “west” of the liberal-capitalistic economic
model. The post-war developments not only saw a rapid reconstruction and economic rise of
western European countries, and the affirmation of the USA as the most developed country,
but also, since the ‘60s, a process of generalized de-colonization in many countries
previously under the direct control of western Powers.
The need of western enterprises to invest and operate in political, economic, social
environments of newly-formed countries brought many institutional agencies and private
consultants to develop a new discipline, country risk analysis, in order to create a reliable
framework of information on foreign countries risk profile in support of enterprise’s
investments and operations. The rise of country risk analysis emerged, then, as a direct
consequence of the specific need, coming from the business world, to have a set of
information about risks in a given country for future possible operations and investments.
As Meldrum affirms “all business transactions involve some degree of risk. When business
transactions occur across international borders, they carry additional risks not present in
domestic transactions. These additional risks, called country risks, typically include risks
arising from a variety of national differences in economic structures, policies, socio-political
institutions, geography, and currencies. Country risk analysis attempts to identify the
potential of these risks to decrease the expected return of a cross-border investment”
(Meldrum, 2000).
In the first “phase” of the conceptual and operative development of Country Risk Analysis,
between the 60s and 70s, the focus relied mainly on the political dimension of Country Risks.
In this period, for instance, characterized by new political-institutional environments within
many countries due to the post-colonization process, foreign enterprises needed a risk
analysis and assessment on risks coming from the political environment, that is, risk of
nationalization or breach of contract, or also risk coming from insecurity and political
instability. (Gioia et all, 2012).
In a second phase, from the mid-70s and 80s, the focus of CRA rapidly shifted from political
risks to economic and financial risks. Country Risk Analysis models, previously based on
qualitative data analysis methodologies, began do develop mathematical and statistical
techniques for the analysis – and aggregation - of complex quantitative data. The new trend in
CRA also involved the development of aggregative risk scores index in order to compare the
risk level among many different countries. This operative and conceptual shift in the
discipline of CRA was due mainly to the debt crises in the 80s and financial crises in the 90s,
that pushed enterprises to develop new analysis frameworks in order to operate in foreign
countries safeguarding their profits. (Gioria et all, 2012. Bouchet et all, 2003).
The new trend in today’s ever changing world is to develop comprehensive country risk
analysis models in order to obtain risk profiles more complete as possible. This new scenario
is characterized by the need of both economic-financial analysis (as demonstrated by the
financial crises in 2008 and the current sovereign debt crisis) and political analysis (as
demonstrated by the Arab springs).
3
Within this context, it is widely acknowledged the lack of a common concept and definition
of what actually constitutes a political risk. From the lack of a common definition of political
risk derives the lack of a universal model of analysis. The two aspects of political risk
analysis – that is the concept and definition of what political risk is and the methodology of
analysis – are extremely heterogeneous and heavily depend upon the actor that develops the
analysis model.
In the following, we will begin by addressing the question of what political risk is by offering
a brief overview of some academic definitions, trying to develop a general definition of
political risk. Then, we will assess how different practitioners – both international and
national, public and private – define political risk through the variables used in their analysis
model. Through this, we will be able to observe that political risk analysis models and
definitions are mainly oriented through factors and variables internal to a country. In the
second part of the paper we will turn to the globalization debate. We will show the relevance
of the transnational dimension for any correct political risk analysis and propose a new model
that integrates local and transnational variables.
The concept of political risk
Weston and Forge affirm that political risks come from the actions of national governments
that intervene on financial transactions, change the terms of agreements, or cause a loss in
the profits of foreign enterprises. This approach focus entirely on the actions coming from
national governments and having an impact on the activity of foreign companies. (Weston,
Sorge. 1972).
Other authors, such as Green, Van Agmatel, Zink, Daniels, Dimsza, as reported by Umberto
Gori, take a different approach. In defining the concept of political risk, they take into
account also “environmental” factors that can constitute an impediment or an obstacle for
operations and investments of foreign economic actors. For instance, these type of factors are
represented by political instability and violence. For these authors, political risk is a
combination of “environmental” and government led factors that creates obstacles to the
economic activity or represent a threat for the profits of foreign companies. (Gori, 1988).
Another author, Robock, affirm that there are political risks in international businesses when
there are discontinuities in the sphere of business, these discontinuities are hard to anticipate
and are the result of a political shift. In order to be a political risk these discontinuities should
represent a potential threat for a foreign enterprise’s profits and/or objectives. (Robock,
1971). In line with this approach is the definition of Haendell, for whom political risk is the
risk or probability of occurrence of political events that may change profit expectations for an
investment. (Haendell, 1979).
Root is probably the author that elaborates the most complete definition of political risk,
focusing not only on the relationship between the political drives of harmful events on
foreign economic operations and investments, but also establishing a sort of classification of
political risks. Root sustain that a political risk is the probability of occurrence of any
political event (such as war, revolution, coup d’etat, expropriation, discriminatory taxation,
restriction on importations, etc..) both at national and international level, causing harms to the
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profits and/or assets of an international economic operator. Root says that a political event
results from actions of political and governmental authorities of a country.
Root introduces the difference between political/economic risks and socio/political risks.
Political/economic risks are associated with the actions of governments, that are primarily
responsible for non forecasted or anticipated changes in the internal and external economy of
a country. Socio/political risks, on the other hand, come from government responses to noneconomic changes in a country’s society. (Root, 1972).
With regard of the interaction between economic and political areas, it has to be underlined
that it has been the focus of several authors. In fact, very often the political dimension is
strongly related to the economic dimension. But a division has to be made in order to develop
a correct conceptualization of political risks. Schollhammer affirms that a distinction is
necessary since political risks come from public policies while economic risks come from
market changes, both causing harms to the profits and operations o fan economic actor.
Schollhammer also says that the actors responsible of political risk are more easily
recognizable than those causing economic risks. (Gori, 1988).
Relevant is also the contribution of Smith Warrick. He proposes a distinction of political risk
in three categories: traditional political risks, normative risks, and half-commercial risks.
Traditional political risks are those risks effecting/including expropriations, currency
conversion, currency transfers, political violence and instability. Normative risks include
risks that effect the normative framework and were not anticipated, including, i.e. new
taxation on foreign profit. Finally, half-commercial risks are those risk that come from an
operation involving, as counterpart, government or state actors, with a questionable capacity
to fulfill a contract. (Warrick, 1998).
From this brief survey, a general definition of political risk can be drawn. Political risk is
constituted of those risks emerging from the political-institutional environment of a country
and having possible harmful effects on profits, assets and/or interests of an international or
foreign business company.
If we move from a general and theoretical definition to a more operational one, it is possible
to analyze the specific components of political risk. This can be done through an assessment
of PR practitioners approaches and definitions. Here we consider a Political Risk Practitioner
any a private or public, national or international, actor that performs, as part of its core
business, political risk analysis.
The Multilateral Investment and Guarantee Agency (MIGA), institution part of the World
Bank Group, is by no doubt a PRP. MIGA defines political risk as “the probability of
disruption of the operations of companies by political forces and events, whether they occur
in host countries or result from changes in the international environment. In host countries,
political risk is largely determined by uncertainty over the actions not only of governments
and political institutions, but also of minority groups and separatist movements.” (MIGA,
2011).
In the 2011 report on “World Investment and Political Risk” MIGA identifies eight main
components, or variables, of political risk (MIGA, 2011):
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
Transfer and convertibility restrictions: risk of losses arising from an investor’s
inability to convert local currency into foreign exchange for transfer outside the host
country. Currency devaluation is not covered.

Expropriation: the loss of investment as a result of discriminatory acts by any branch
of the government that may reduce or eliminate ownership, control, or rights to the
investment either as result of a single action or through an accumulation of acts by the
government.

Breach of contract: risk of losses arising from the host government’s breach or
repudiation of a contractual agreement with the investor, including non-honoring of
arbitral awards.

Non-honoring of sovereign financial obligations: risk of losses due to non-compliance
government guarantees securing full and timely repayment of a debt that is being used
to finance the development of a new project or the enhancement of an existing project.

Terrorism: risk of losses due to politically motivated acts of violence by non-state
groups.

War: risk of losses due to the destruction, disappearance, or physical damage as a
result of organized internal or external conflicts.

Civil disturbance: risk of losses due to social unrest.

Other adverse regulatory changes: risk of losses for foreign investors stemming from
arbitrary changes to regulations.
Remaining in the field of public agencies, but moving from international to national
perspective, SACE, the Italian export credit agency, has a slightly different definition of
political risk. For SACE, PR is composed of four main components: expropriation risk,
breach of contract risk, transfer risk and risk of political violence. (SACE. 2010, 2012). Each
of these four components is then declined in several indicators:

Risk of expropriation: rule of law, government effectiveness and intervention, control
of corruption, property rights.

Risk of Breach of Contract: Rule of law, government effectiveness and intervention,
control of corruption.

Risk of Transfer: currency exchange, international reserves, political risk indicator,
current account balance.

Risk of Political Violence: voice and accountability, absence of violence/terrorism,
rule of law.
This last approach to political risk is adopted also by the Organization for Economic CoOperation and Development. The OECD uses a country risk methodology relying principally
upon a mathematical-statistic approach, identifying and calculating a country risk score based
on economic-financial dimensions. In this model the political risk component has the role of
a qualitative correction made to an aggregated score of economic-financial risk.
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In fact, the OECD developed a so called Country Risk Assessment Model (CRAM) with the
purpose of creating an aggregated score giving the country risk profile. The CRAM is
developed starting from an economic-financial risk score, developed through a quantitative
risk analysis model based on three macro-variables: payment experience, financial situation
and economic situation. These three variables form an aggregated economic-financial risk
score, which is “qualitative adjusted” with the political risk score. That is, the “political
situation” of a country is used to change, in better or worse, the score in order to have an
overall country risk score. The CRAM is taken as a point of reference by many other actors.
For OECD, the “political risk” then is characterized by:

Political stability;

Social tensions;

Expropriations;

Political violence;

Transfer risk.
Figure 2.1 OECD Country Risk Model. SACE Training&Advisory.
Moving from public agencies to private ones, we observe that, despite different analysis
model, the degree of divergence diminishes for what concerns the concept itself of political
risk. For instance, the Country Risk Model defined by the Economist Intelligence Unit (EUI)
defines political risk through ten variables: external conflict, governability/social unrest,
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electoral cycle, orderly transfers, event risk, sovereignty risk, institutional effectiveness,
corruption, corruption in the banking sector, commitment to pay.1
It is possible to observe that EIU uses a disaggregated approach compared to OECD, SACE
and MIGA models: EIU developed more variables, which in other risk analysis models are
compressed in macro-variables. This last approach is used also by the PRS Group, editor of
the International Country Risk Guide. The ICRG, for the definition of the political risk index,
uses twelve variables: government stability, socioeconomic conditions, investment profile,
internal conflict, external conflict, corruption, military in politics, religious tensions, law and
order, ethnic tensions, democratic accountability, bureaucracy quality.2
In short, from these analysis model emerges a variety of conceptualizations of political risk. It
has to be underlined that most of these models are developed as Country Risk Analysis
Models, and that the political risk is just one component of a broader analysis. Despite this,
and the different concepts and variables used for defining political risk, we see that there is a
common framework used for the development of political risk. The theoretical definition of
political risk as risks emerging from the political-institutional environment of a country and
having possible harmful effects on profits, assets and interests of an international or foreign
business company is positively tested if we look to the concrete analysis model as we did in
the above paragraphs.
Practitioner
Political Risk Variables
SACE
• Risk of expropriation;
• Risk of Breach of contract;
• Risk of Transfer;
• Risk of political stability.
MIGA
• Transfer
and
convertibility
restrictions;
• Expropriation;
• Breach of Contract;
• Non – honoring of sovereign
financial obligations;
• Terrorism;
• War;
• Civil Disturbance;
• Other adverse regulatory risk.
OECD
• Political stability;
• Social tensions;
• Expropriation;
• Political violence;
• Transfer risk.
EIU
•
•
•
•
• Institutional effectiveness,
corruption;
• Corruption in the banking
sector;
• Commitment to pay.
External conflict;.
Governability/social unrest;
Electoral cycle;
Orderly transfers;
1
http://graphics.eiu.com/upload/eb/Benefits_CountryRiskService.pdf
2
http://www.prsgroup.com/ICRG_Methodology.aspx.#Background
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• Event risk, sovereignty risk;
PRS Group
•
•
•
•
•
•
Government stability,
Socioeconomic conditions,
Investment profile,
Internal conflict,
External conflict,
Corruption, military in politics,
• Religious tensions,
• Law and order,
• Ethnic tensions,
• Democratic accountability,
• Bureaucracy quality.
Figure 2.2 Different concepts of political risk.
Observing the various concepts of political risk, it is possible to observe that all models are
based on internal country-related variables. Although the international or external
implications of each variable is assessed in the analysis, there is no formal recognition, in
variables or under-variables, of the international effects on political risk. From our point of
view this constitutes a limitation: in a globalized and ever changing world, focusing entirely
on the internal dimension of a given country may easily fail to capture the complexity of the
socio-political phenomena. The international, or transnational, dimension, is fundamental in
order to understand, and then assess, in a proper way a very complex socio-political category
such as political risk.
Globalization: a new paradigm.
The concept of globalization is relatively new and it was designed to denote a profound shift
in the international scenario after the end of the Cold War, in the early 1990s. At that time,
with the collapse of Soviet Union and the end of the bipolar order, characterized by the
conflict of two major superpowers, it was believed that the west liberal-economic democratic
doctrine would have been the drive for a new era of peace and prosperity (Fukuyama 1992).
The victory of capitalism, the “end of history”, started a process of international economic
transformation, in which former “enemies” of capitalist economic approach started to reform
themselves economically, opening to international trade and international financial flows.
The starting of the economic globalization, and the process of deeper integration in social,
cultural, political domains, brought us in late ’90 in the globalization process. As Giddens
says, “globalisation is political, technical and cultural, as well as economic. It is ‘new' and
‘revolutionary' and is mainly due to the ‘massive increase' in financial foreign exchange
transactions. This has been facilitated by dramatic improvement in communications
technology, especially electronic interchange facilitated by personal computers”. (Giddens,
1999).
This profound shift between the Cold War world and globalized world has been described by
Thomas Friedman in “The lexus and the olive tree”. Friedman argues that “as if the defining
9
perspective of the Cold War world was "division," the defining perspective of globalization is
"integration." The symbol of the Cold War system was a wall, which divided everyone. The
symbol of the globalization system is a World Wide Web, which unites everyone. The
defining document of the Cold War system was "The Treaty." The defining document of the
globalization system is "The Deal." (Friedman, 1999).
Globalization is for sure a controversial concept. There are different perspectives toward
globalization, and as it was explained by Held and McGrew (2010) there are mainly two
approaches: skeptical and globalist.
Skeptical approach think that globalization as a process doesn’t exist and that in the past we
experienced similar, if not deeper, international integration, especially from a commercial
trade point of view. As Hirst and Thomson sustain, “globalization is not a new phenomenon
since (i) Large inter-national flows of trade, portfolio and direct investment, as well as,
migration flows are nothing new. (ii) The beginning of this century saw a similar, if not
higher, intensity of transactions across borders. Multinational companies are not borderless
institutions. They are well embedded in their own home nation-state in terms of share of
overall activities. (iii) Most international flows are confined within well-.defined regions
rather than spread across the globe. (iv) Capital mobility is confined within the developed
countries and does not produce massive shifts from developed to developing countries. Its
globaloney! (Hirst and Thomson, 1996).
Globalists, on the other way, think that globalization exist and that it is a process of
constantly and progressively deeper international integration, pushed by many drives
(economic, political, social, cultural).
There are different conceptualization of globalization, based on different perspectives and
focuses. Many authors studied and defined economic globalization, which is, by any doubt,
the strongest drive to the globalization process as a whole. For instance, Jagdish Bhagwati
defines economic globalization as the “integration of national economies in global economy,
through trade, foreign direct investments, capital, workers, people and technology flows”.
(Bhagwati 2005).
For Cox, “the characteristics of the globalization trend include the internationalizing of
production, the new international division of labor, new migratory movements from South to
North, the new competitive environment that generates these processes, and the
internationalizing of the state making states into agencies of the globalizing world”. (Cox,
1994). Another author, Dicken, foused primarily on the economic dimension of globalization.
Dicken sustain that “internationalization processes involve the simple extension of economic
activities across national boundaries. It is essentially a quantitative process which leads to a
more extensive geographical pattern of economic activity. Globalization processes are
qualitatively different from internationalization processes. They involve not merely the
geographical extension of economic activity across national boundaries but also -and more
importantly - the functional integration of such internationally dispersed activities.” (Dicken,
1998).
Jones and Oman too focus their approaches on economic globalization. For Jones, “ in
essence, globalization is seen as economic integration, achieved in particular through the
establishment of a global marketplace marked by free trade and a minimum of regulation. In
contrast, internationalization refers to the promotion of global peace and well-being through
the development and application of international structure, primarily but not solely of an
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inter-governmental kind.(...) the essentially pro-democratic logic of internationalism stands in
sharp contrast to the logic of globalization”. (Jones 1998).
Oman sustain that “globalization is the growth, or more precisely the accelerated growth, of
economic activity across national and regional political boundaries. It finds expression in the
increased movement of tangible and intangible goods and services, including ownership
rights, via trade and investment, and often people, via migration. It can and often is facilitated
by a lowering of government impediments to that movement, and/or by technological
progress, notably in transportation and communications. The action of individual economic
actors, firms, banks, people, drive it, usually in the pursuit of profit, often spurred by the
pressures of competition. Globalization is thus a centrifugal process, a process of economic
outreach, and a microeconomic phenomenon “(Oman, 1996).
Other authors focused on cultural and social side of globalization. For Appadurai “the critical
point is that both sides of the coin of global cultural process today are products of the
infinitely varied mutual contest of sameness and difference on a stage characterized by
radical disjunctures between different sorts of global flows and the uncertain landscapes
created in and through these disjunctures. (Appadurai, 1990).
Featherstone, on the other hand, offers an interesting approach toward the dimension of
globalization: “the process of globalization suggests simultaneously two images. The first
image entails the extension outwards of a particular culture to its limit, the globe.
Heterogeneous cultures become incorporated and integrated into a dominant culture which
eventually covers the whole world. The second image points to the compression of cultures.
Things formerly held apart are now brought into contact and juxtaposition”. (Featherstone,
1995). One of the most famous publications on cultural globalization is “The
Mcdonaldization of Society” by George Ritzer (1993), in which the author tries to explain the
new cultural paradigm in globalization using the example of global spread of McDonald
restaurants.
Moving to more general and open approaches, we can see that globalization is often defined
as a process of integration from local dimensions to a common and global one. One of most
interesting definition is given by Robertson, whom sustain that “globalization is a process
that comprises two simultaneous processes: global compression of the world and the
intensification of consciousness of the world as a whole. Globalization does not simply refer
to the objective process of increasing interconnectedness. It also refers to conscious and
subjective matters (namely the scope and density of the consciousness of the world as a
single place. (Robertson, 1992).
In short, Robertson points out that globalization is an overall process affecting both the
geographic dimension and the conscience dimension of globe’s societies. Through changes in
transports, technology, way of life, and cultural, social, political, economic integration, the
world isn’t just “smaller” and a single entity, but it is also perceived as such. This implies a
profound switch in how we conceptualize the world and life events. As Hoogvelt says,
“globalization has rearranged the architecture of world order. Economic, social and power
relations have been recast to resemble not a pyramid but a three tier structure of concentric
circles. All three circles cut across national and regional boundaries”. (Hoogvelt, 1998).
This same approach is adopted by David Held and Anthony McGrew in “Globalization/AntiGlobalization, in which they propose a structured and comprehensive approach toward
globalization. (Held and McGrew, 2010). For the two authors globalization is, first and
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foremost, a process that – through an intensification and enlargement of different
relationships (social economic, cultural – leads to a new cause-effect paradigm in which local
events have global effects and vice-versa.
We largely concur with Robertson and Held and McGrew. We think that globalization is a
process (and then it is an evolving situation) of increasingly deeper international integration ,
which creates a scenario in which particular dimensions become interdependent one with
another, and then produces events affecting other dimensions and, by this, producing other
events and so on. In short we defines globalization as the process of economic, social,
cultural and political integration developed through the creation of transnational networks
that combine both the material and the cognitive dimension.
The idea on which relies our concept of globalization is that it is mainly a bi-dimensional
process, which creates a global scenario that comprises every aspect of human life. This
process is characterized by interdependence between the vertical geographic level
(International – regional – national – local) and the horizontal topic level (political,
economic, cultural, financial, social). The result is that it is always more difficult to
understand the cause-effect connection of today’s events.
Given this concept of globalization, we think that, in a modern political risk analysis model, it
is necessary to take in consideration the international – or transnational – dimension of
political risk. If a PRA model wants to properly address the political risk profile for a given
Country, it is fundamental to assess the implications deriving from globalization and from the
international – transnational integrations of that Country.
The new paradigm of globalization: a comprehensive cause-effect approach
international
economics
finance
politics
culture
EVENTS
national
society
Rights&law
tech
religion
Geographic dimension
regional
local
Topic dimension
12
Figure 3.1 Marchetti-Vitale: globalization approach
A political risk analysis model that doesn’t develop such a variable may underestimate very
important factors (such as international ones) that may have important effects on the internal
variables used in the construction of political risk analysis. This is mainly due to
globalization, which created interdependence links between different dimensions and made
the cause-effect connection of events extremely complex to understand. Our purpose, in the
following Section, will be precisely to develop a inter/trans national variable.
A new model of political risk analysis: the transnational variable
In the previous paragraph we saw that the concept of political risk can be theoretically
defined in a clear way, and that from an operative approach the concept is still extremely
fuzzy. Our object, in this last part of the paper, is to develop a conceptual model that is more
efficient in the analysis of political risk, through a better understanding of current political
scenarios. In order to do that, we will build on the political risk analysis model developed by
Leonardo Morlino and Cecilia Sottilotta, integrating it with an international/trans-national
dimension, constituted of different variables based upon indicators taken from reliable
sources.
The model developed by Morlino and Sottilotta defines a set of “rules of the political risk
concept building” (Morino-Sottilotta, 2012). These rules are3:
1.
2.
3.
4.
When dealing with PR, a part-whole hierarchy approach is to be preferred to classic,
Aristotelian kind-hierarchy.
PR can be thought of as a “three level concept”, with a basic level, a secondary level
(dimensions) and an indicator/data level.
In order to build consistent and reliable measurement techniques for PR, special
attention should be paid to the relationship between the basic and the secondary level
of the concept.
Such relationship should be conceptualized as a causal one, and its direction as being
a“bottom-up one”, configuring a model in which the dimensions are the explicative
variables, and political risk the explained one.
In their model political risk is operationalized taking into account two dimensions: political
stability and rule of law. Political stability was defined as the “absence of domestic civil
conflict and violent behavior and of structural political change”. Rule of law was instead
conceptualized as “a multifaceted concept in itself, lies at the heart of many scholarly
endeavors aiming at defining it both in normative and empirical terms. The rule of law is not
3
Citation, Morlino, L. Sottilotta, C. Political RIsk Assessment and the Arab Spring. Suggestion for further
research. Political Risk Analysis-Research Seminar, ICEDD, LUISS Guido Carli, Rome, June 27th , 2012.
13
only the enforcement of legal norms. It also connotes the principle of the supremacy of law,
that is, the Ciceronian legum servi sumus, and entails at least the capacity, even if limited, to
make authorities respect the laws, and to have laws that are non-retroactive, publicly known,
universal, stable, and unambiguous”. (Morlino-Sottilotta, 2012”.
These two dimension are then empirically defined through several sub-dimensions. The subdimensions and the empirical definitions of political stability and rule of law are drawn up
starting from previous researches in the fields of political science and comparative politics,
and data are derived from reliable sources.
In short, this model is very useful in the development of our trans-national dimension as it
was constructed upon a very strong theoretical approach and the variables and indicators are
identified relying on robust empirical researches. Therefore this model offers a solid base,
especially for the internal dimensions of political risk, for the construction and development
of our international/trans-national variable.
In the following figure we summarize the model developed by Morlino-Sottilotta in a
schematic way. The figure shows the two dimensions, their sub dimensions and the sources
utilized by the two authors.
Political Stability Dimension (Sources)
 Human Development (HDI Index);
 Inequality (HDI Index);
 Political Legitimacy (EIU Political
Stability Index);
 Constraints to Responsiveness
(TODEM Data by Morlino-Quaranta);
 International/Regional Integration
(Levitsky and Way Index).
Rule of Law Dimension (Sources)
 Civil Order (Cingranelli and Richards
Physical Integrity Index);
 Property Rights (Fraser Institute's
Economic Freedom of the World
Index);
 Military Interference (Fraser Institute's
Economic Freedom of the World
Index);
 Integrity (Transparency International's
Corruption Perceptions Index);
 Constraints and Executive (Polity IV
project4).
Figure 4.1 Morlino-Sottilotta Political Risk Analsysis Model.
14
It is possible to observe that the model described in the above figure contains a sub dimension
called “International/Regional integration”, under the political stability dimension. As
explained by Morlino-Sottilotta, this sub-dimension “aims at capturing the external
dimension of political stability, relying on the hypothesis that the lower the level of
integration of a country in the international community, the higher the potential for political
instability. Linkage is operationalized in terms of exports as share of GDP, leverage is
measured in terms of membership in three international organizations: the UE, NATO and
WTO”. (Morlino-Sottilotta 2012).
It is extremely positive that this model contains such sub dimension but, in our opinion, this
is too limited. In fact, globalization and international integration, as we have seen, are more
complex concepts, involving a lot of factors and indicators.
We therefore think that is necessary to develop a third dimension, called international/transnational, that aims to assess the level of global (both formal/institutional and
informal/practice-based) integration reached by a country. This dimension is then constructed
upon three different sub dimensions: economic integration, political integration and sociocultural integration. This operationalization reflects the modus operandi adopted by several
globalization indices, such as the ones developed by KOF, A.T. Kearney/Foreign Policy and
others.
It is very important to note that in our model the level of internationalization/globalization
reached by a country is proportionally inversed to the level of political risk. In short, we
hypothesize that the international/trans-national variable constitutes a mitigating factor for
political risk.
The economic integration sub dimension analyses the level of international, trans-national
and regional economic integration reached by a country. This first sub dimension is pivotal in
the development of a international/trans-national dimension, because, as we have seen,
international economy and trade were the principal areas in which globalization started to
develop and still are the primary drivers of the globalization process as a whole. As for the
dimension as a whole, our assumption is that the higher is the level of international economic
integration, the lowest is the political risk level.
This sub dimension is constituted by different indicators/sources:

IMF Financial Data: use of quota based resources to finance operations, national share
of quota in the IMF.

Trade of Goods in US Dollar (Export-Import) from the Commodity Trade Statistic
Division, UN Statistic Database;

Export of Goods and Goods and Services in % of GDP, World Bank Data;

Balance of Payments-current account, UN Global Indicators Database;

Foreing Direct Investment net inflows, World Bank Data;

External Debt Stock in current US Dollars, UN Global Indicators Database;

Official Development assistance and official aid in US Dollars, UN Indicators
Database;
15

Structural Adjustment Projects, Regional Bank for Reconstruction and Development
Statistic Databases;

Taxes on international trade, World Bank Data (risk factor).
The second sub dimension is the one measuring the international/trans national political
integration. This aspect is very important as the participation to international organizations,
the presence of NGOs, the presence of international or terrorist organizations, have a strong
impact in classic variables of political risk such as rule of law, political stability, absence of
violence, risk of breach of contract, etc... It is important to note that in this sub-division some
indicators are political risk mitigating factors, while others are risk threats.
The political integration sub-division is constituted by the following indicators/sources:

Participation to Treaties, Conventions, Charters, Pacts, Agreements developed by,
deposited to, or sponsored by the United Nations. UN Nations Treaty Collection
Database;

International Disputes, CIA World Factbook (risk factor);

Terrorist Attacks from international/external terrorist groups, Global Terrorism
Database (risk factor);

Presence of UN Peacekeeping Mission and/or filed missions, United Nations
Peacekeeping Statistics;

Presence of NGOs, Worldwide NGO Directory;

Number of international refugees, United Nations High Commissioner for Refugees;

Participation to International Organizations, CIA World Factbook;
Finally, the third sub dimension is the socio/cultural integration one. This sub dimension
analyses the level of international, trans-national and regional integration reached by a
country from a social and cultural point of view. This sub dimension is particularly important
for the development of a conceptualization of the world as one unified social entity, in short it
allows the people to better accept and spread the process of globalization.
This third sub-dimension is constituted from the following indicators/sources:

Arrivals of non resident tourists/visitors, departures and expenditure in the country
and other countries, World Tourism Organization;

Internet Users in % of population, UN Global Indicators Database

Daily Newspaper circulation per 1000 inhabitants, UN Global Indicators Database

Mobile Telephone subscriptions per 100 inhabitants, UN Global Indicators Database

Total Number of combined radio and television instititutions, UNESCO Institute for
Statistics;
16

Foreign Population (non-citizens) from 15 years of age and over, UNSD
Demographic Statistics, UN Statistic Database;

Net Migration, World Bank Data;

Percentage of individuals using the internet, World Telecommunication/ICT
Indicators Database;

Mobile Telephone subscriptions per 100 inhabitants, World Telecommunication/ICT
Indicators Database;

Indicators of access to, and use of, ICT by households and individuals, International
Telecommunication Union;

International voice traffic out and in (minutes), World Development Database
Indicators;

International Letters, United Nations Commodity Trade Statistics Database.
The international/trans-national dimension allows to determine the level of integration
reached by a determined country in a detailed way. We think that this approach, based on the
three main dimensions of globalization (economic, political and socio-cultural) provides a
good bases for developing a comprehensive and precise variable that, in combination with the
internal dimensions of political risk, is able to produce more reliable analysis.
The complete Political Risk Analysis model, drawn starting from the one developed by
Morlino-Sottilotta, is shown in the following figure.
Political Stability
Dimension
Rule of Law
Dimension
 Human Development;
 Civil Order;
 Inequality
 Property Rights;
 Political Legitimacy;
 Military Interference;
 Constraints to
Responsiveness;
 Integrity;
 International/Regional
Integration.
International/Trans-national
Dimension

Economic
Integration;

Political Integration;

Socio-Cultural
Integration.
 Constraints and
Executive.
4.2 The Political Risk Analysis model integrated with the Marchetti-Vitale
International/Trans-National Dimension.
17
Conclusions
The objective of this paper was to develop a conceptual model, and to propose a new
theoretical approach to political risk analysis through the introduction of an
international/trans national variable/dimension.
To this end, we focused our attention in developing the conceptual approach and in
researching the most reliable indicators and sources (available through Open Source
Intelligence) for the construction of the international/trans-national variable. We think that
the sub dimensions proposed, and the relative indicators, represent the best possible scheme
for the construction of such a variable, given the information and data currently available.
In this last brief paragraph we wish to briefly outline a possible way forward in the
development of the international/trans-national variable.
We think that a more rigorous scientific research in the field of political risk analysis would
benefit both the academia and the enterprises world. In fact, a mechanism of mutual benefit
could be established: the academia could help agencies and practitioners to develop always
better political analysis model thanks to the knowledge and expertise developed on topics
such as political regimes, democratization processes, political leadership, electoral systems,
and indeed globalization, and, the enterprises could help academic researchers providing first
hand feedback, data and information.
Bearing this in mind, we tried to contribute to the conceptualization of political risk
proposing a model that introduced an international/trans-national variable that remains key in
order to develop a model able to fully capture the political scenario in any given country.
As it was said in the previous section, we focused our work on two areas:

The development of a theoretical base for our proposal of a new international/transnational variable in a political risk analysis model;

The operationalization of the three sub dimensions: political integration, economic
integration and socio-cultural integration, through the identification of the best
available indicators.
We consider this paper and the work behind it a starting point. In the next months we will
focus our work in the further development of such a model, starting to construct in a
quantitative manner the model itself in order to produce a useful tool for the analysis of
political risk in several countries and for the development of comparative political risk index.
To this end, we will focus our forthcoming work on:

A more precise operationalization and definition of every sub-dimension;

The technical construction of our political risk analysis model;

The empirical testing of this newly formed political risk analysis model, in order to
demonstrate that it is capable of better define the political risk profile.
18
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