Economic Woes Raising Global Political Risk

Risk watchers say global companies face new challenges as the crisis sows political strife around the world

By Jack Ewing

When angry demonstrators take to the streets in Reykjavik, the Icelandic capital once known mainly for sweaters, smoked fish, and the singer Björk, you know things are getting ugly. Protests in recent months, by citizens frustrated at the destruction of the national economy by overextended Icelandic banks, brought down the Icelandic government in January—just one sign of how the financial stress is fueling popular unrest around the world.

Bulgaria, Greece, and Latvia are other examples of countries once seen as stable that have experienced widespread, unruly demonstrations recently. Even Russia and China have had scattered protests, signs that citizens are unhappy enough to risk reprisal by repressive authorities.

The global financial crisis is making itself felt in the lives of ordinary people, and they're mad about it. As a result, professional risk watchers say, global political instability is rising fast and creating yet another new challenge for companies doing business around the world.

In more developed nations, the rise in political tension could lead to populist policies. French President Nicolas Sarkozy caused a political storm when he criticized French auto companies in February for moving production to countries such as Slovakia—which also happens to be a member of the European Union. "We are seeing some protectionism," Dieter Zetsche, chief executive of German automaker Daimler (DAI), told reporters on Mar. 3 at the Geneva Motor Show.

Expatriate Workers Send Home Less Money

And in emerging nations, the financial crisis is proving to have effects that no one anticipated. A few months ago the conventional wisdom was that poor countries isolated from the global financial system would be relatively immune from the crisis. But it turns out that people don't even have to have bank accounts to suffer from the banking crisis. "Don't underestimate the extent to which the global economy reaches into the smallest market," says Donald Steinberg, a former U.S. ambassador to Angola who is deputy president of the International Crisis Group, a Brussels-based conflict-resolution and human rights organization.

The main conduit of misery is a slump in so-called remittances, the money that expatriate workers send home. Remittances total some $300 billion worldwide, and account for 20% or more of gross domestic product in countries such Bosnia, Haiti, and Lebanon,. But they have slumped as expatriates lose their jobs or trim the amount they send home. Further aggravating the plight of poor nations, the global slump could prompt donor nations to cut international aid and individual givers to curtail their charity.

The former Soviet state of Tajikistan is one example of a country slammed by lower remittances. According to some estimates, as many as half the adult men in Tajikistan are working abroad, primarily in the Russian construction industry. The amount of money they send home has plunged along with the Russian economy. To make matters worse, Tajik authorities have diverted scarce electric power from consumers to the nation's aluminum smelting industry in a desperate bid to generate foreign currency. As ordinary Tajiks freeze in their homes, the risk of political upheaval grows.