Investment potential of China, India and Russia undermined by poor governance and societal resilience
According to a major new report, the BRIC countries of Brazil, Russia, India and China are no better placed to withstand shocks from major risk events than they were four years ago.
The findings of the Global Risks Atlas 2012, released by risk analysis firm Maplecroft, indicate that strong economic performance in the BRICs has not translated into improved societal resilience or governance, which constrain a country’s ability to adapt and combat potential shocks from pandemics, terrorism, conflict, resource security, economic contagion and the impacts of climate change.
“With hopes for a global economic recovery resting with the BRICs, investors and business seeking new high-growth, high-risk markets need to be aware of their limited resilience to global risks.” states Maplecroft CEO Alyson Warhurst. “A country’s resilience to external and internal shocks is built up over time, so as the BRICs political risk environment improves we might see resilience strengthen, but our results reveal this is yet to happen.”
The fourth annual Global Risks Atlas highlights potentially destabilising factors in the world’s key growth economies. Maplecroft classifies global risks as those that cut across borders, affecting multiple areas of the world with major impacts on countries and business alike. The Atlas covers 178 countries and includes 33 indices within five global risk areas, which calculate exposure to macroeconomic risk, security, resource security, climate change and infectious diseases. It also evaluates governance and societal resilience to measure how prepared nations are to adapt to the impacts of global risks.
The 10 countries most exposed and least resilient to global risks are: Somalia (1), DR Congo (2), South Sudan (3), Sudan (4), Afghanistan (5), Pakistan (6), Central African Republic (7), Iraq (8), Myanmar (9) and Yemen (10).
For investors and business though, it is the resilience of the BRIC economies of Brazil, Russia, India and China to withstand global risks that is increasingly important, as they become central to the fortunes of the global economy due to their increased economic might and integration with individual economies.
According to the Atlas findings, none of BRICs have improved their performance in relation to their resilience to global risks over the course of the last four years. This is despite cumulative GDP growth between 2009 and 2012 of 16% for Brazil, 13% for Russia, 28% for India and 32% for China.
“Economic gains have yet to transform the resilience of the BRICs to major risk events,” adds Warhurst. “Improvements in basic social infrastructure, such as education, healthcare and sanitation for large sections of society, are vital in combating the impacts of global risks. Without these, and improvements in governance, the BRIC economies may not fully realise their investment potential.”
Brazil (ranked 97 in the Atlas) is largely buffered from the destabilising influences of global risks and performs markedly better than its BRICs counterparts, due, in part, to its strong democratic governance and regime stability. However, poor governance and a relative lack of societal resilience in India (19), Russia (30) and China (58) are identified as significant factors that could undermine their ability to combat the effects of ‘black swan’ events.
Continuing poor governance is evidenced by the endemic nature of corruption, especially in India and Russia, where the political process is undermined by an inability to tackle the problem. In India, for instance the political standoff over a new anti-corruption law between the ruling Indian National Congress and the opposition Bharatiya Janata Party, both of which have been hit by recent corruption scandals, has severely disrupted law-making. Uncertainty for investors in Russia has also been compounded by anti-government protests relating in part to suspected irregularities in the elections.
Terrorism and political violence are also identified by Maplecroft as particularly prevalent risks in India and Russia, which threaten human security and business continuity, while diverting valuable government resources and money. Security issues in China also exist due to localised protests and unrest relating to a lack of political freedom and social gains. Upheaval on a national scale remains unlikely though, as the country’s strong economic performance buffers it from further popular dissent at present.
The high growth, resource rich, economies of Argentina (123), Chile (131) and Mongolia (117) all emerge as countries relatively well insulated from global risks and make attractive investment destinations, especially for the mining sector.
Mongolia remains heavily reliant on neighbouring China and Russia as export markets and for energy imports. While these countries sustain high rates of growth, Mongolia will continue to benefit from this integration, presenting important opportunities for the country’s mining sector. Mongolia benefits from low exposure to security risks, while also enjoying relatively robust societal resilience.
Chile, meanwhile, has emerged as a model for sustainable development in Latin America. It benefits from high economic growth fuelled by vast mineral resources and has made substantial progress in raising living standards. Low exposure to security risks and infectious diseases is also supported by strong societal resilience and good standards of governance, enabling the country to withstand and adapt to global risks.
New Zealand (176), Finland (175), Denmark (173), Norway (171), Canada (169), Sweden (168), Germany (163) and Australia (159) are among the countries exhibiting the lowest risk, suggesting that traditional Western styled democracies are still among the safest investment destinations in terms of their exposure and resilience to major risk events.