Politics Is Still A Risky Business

A note to our readers: Former Indonesian President Suharto, 86, died on Sunday, January 27, 2008. He led Indonesia from 1965 until 1998, when he was driven from office after months of street protests. During his one-man rule, Indonesia had an average annual growth rate of 6.5%, helping to raise millions of its citizens from poverty to the middle class. But the Suharto regime also made Indonesia one of the world’s most challenging countries for Foreign Corrupt Practices Act compliance. The following article — which appeared under our byline in a slightly different form in the Wall Street Journal Asia in June 1998 — discusses corruption in Suharto’s Indonesia and the frequent links among entrenched regimes, corruption and political risk. — The Editors

As the recent troubles in Indonesia, not to mention South Asia, the Balkans and much of Africa, keep showing, the world is still a very dangerous place. Anyone involved in decisions to deploy capital or people overseas should have some idea of the risks involved, if only to appreciate the need for a good exit strategy. So why has the field of political-risk analysis become almost extinct? To answer that question one must delve a little into the early days of the discipline and its past mistakes. Then it becomes apparent that there’s no reason why it shouldn’t re-emerge, albeit in a more user-friendly form.

This field of study had its heyday back in the early 1980s, when academicians began publishing serious works about political-risk analysis, which became known as PRA. These weighty tomes often bore pretentious titles like “Introduction to Political Risk Analysis” and “A Survey of the Quantitative Approaches to Country Risk Analysis.” A lot of us back then thought PRA was hot and here to stay.

The best time for PRA practitioners was probably marked by the publication of Don DeLillo’s quirky book, “The Names,” in 1983. The narrator-hero was an American expatriate political-risk analyst working in and around the Middle East. I was then a young lawyer at the Arabian American Oil Company in Dhahran, Saudi Arabia, and the copy I snuck in was passed from hand to hand. Typically, around the same time, a few PRA practitioners even started a professional group known, I think, as the American Association of Political Risk Analysts. I joined and heard nothing for almost a year. Then a photocopied half-page notice came in the mail, explaining that the group had dissolved because there didn’t seem to be much demand for the association after all.

In truth, Political-Risk Analysis never really got off the ground. The discipline had problems from the start because it pretended to be quantitative but never really was. In the number-crunching 1980s, that was an unforgivable sin. On top of that, the serious PRA practitioners — mainly ex-university professors from the broad and vague field of political science — blended in with corporate MBA types about as well as Indonesian businessmen with Arkansas politicians.

Today the field is nearly extinct. A few stalwarts hang on like the middle-aged guys who recreate American Civil War battles. But for the most part, to quote from a lonely but comprehensive PRA web site, (www.grai.com), “in the 1980s various MNCs disbanded their political risk functions or incorporated these functions into other staff activities.” Why did the field of Political-Risk Analysis go the way of the buggy whip and Nehru jacket? A book review on the above-named web site laments “three fairly familiar reasons”: (1) failure of companies to formally integrate PRA into corporate decision making, (2) the desensitizing of business people to political risk by its very prevalence, and (3) corporate downsizing of staff groups that would never be profit centers.

But all this is not to say the rest of us should forget about PRA. To be useful, political-risk analysis needs to be simple, that’s all. So I’ve created the “Three Strikes, You’re Out” test of political risk. If a country has all three Strikes, it’s already a political-risk basket case, beyond help or hope. A country with one or two Strikes is sick but ambulatory, and should be treated for business purposes like a fragile aunt. Here are the Strikes. By the way, I strongly recommend against exploring the 3S Test in a dissertation or through other less lethal means.

Strike One: Excessive Love for the Long-Time Leader. It’s a sure sign of coming disaster when the citizenry dearly love their despot. It means he’s been on the throne too long and gone from strong father to cranky granddad. I was in Jakarta last year the day then-President Suharto, or Pak Harto, as he was lovingly called, flew off to Germany for a mysterious medical check up. Everyone was depressed. A man at the airport who wheeled my luggage cart from the curb to the counter was near tears, barely able to shuffle his feet. I thought I saw him on the TV news last month throwing rocks through windows in downtown Jakarta. A leader is over ripe when his country is referred to as his possession. I’m thinking how many times during the past couple of years I read or heard of “Mr. Suharto’s Indonesia.” “Tito’s Yugoslavia,” incidentally, is still falling apart. “Marcos’s Philippines,” like the “Medici’s Florence,” also did not end well. Even “Daley’s Chicago” looked pretty sick in 1968.

Strike Two: The Same Faces in Every Deal. As soon as Mr. Suharto abdicated, the students aptly coined the phrase “nepotism, collusion and corruption” to mean all the evils of his 32-year rule. An American executive working in Jakarta complained to me in 1992 that every time he tried to do anything, one of Mr. Suharto’s kids or cronies would show up and demand a piece of the action. He said it happened on everything, from a $100 million project to routine purchase orders. It was easy to do business in the Philippines during Marcos’s time, likewise in Iran during the Shah’s or Nicaragua during Somoza’s. Foreign investors cut through the red tape by working with one of the few wired local partners. Well-greased insider deals always look good at the time, but are usually too good to be true.

Strike Three: Abnormal Banker Behavior. When expatriate bankers (especially Americans, Germans and Japanese) start acting less like morticians and looking more like game-show hosts, head for cover. My experiences in Indonesia again come to mind. I watched foreign bankers in Jakarta transmogrify from the men-or-women in gray flannel suits to batik-shirted glad handers. I should also have sensed real danger when male bankers showed up at meetings to woo potential borrowers and brought along very attractive young ladies in flowery outfits.

So there is the 3S Test if you want to pursue “PRA,” which, as I said, still has a role to play. There’s also a final warning: You may hear each of the Strikes used separately or in combination to compliment a country’s business climate. Here’s an overheard hotel-lobby remark, and it includes everything you need to know: “Jakarta’s a great place to do business. The people love Suharto. I always see my old friends here. And the foreign bankers are so much fun.”