2018: Recapping the year in political risk
Around this time of year, you start to see lists of the top political risks for the next 12 months.
But we rarely see lists evaluating how our previous predictions performed. Yet even if it is not as topical, assessing past predictions is the only sure path towards a collective improvement and evolution of political risk as a practice.
So before I write my own top risks for 2019, here’s an overview of what the political risk world got right, got wrong, and completely missed in 2018.
What was predicted at the start of the year
I looked at the 2018 top risks lists of four political risk firms: the Eurasia Group, the Economist Intelligence Unit, Stratfor, and Oxford Analytica (full disclosure, I’m an advisor to Oxford Analytica, but I only assessed the firms as a collective).
Some geopolitical situations — like Ukraine, Syria, and Yemen — were mentioned by only one firm each. Others were included in multiple 2018 lists and they formed a portrait of the consensus political risks for the year. They were, in no particular order:
US-Iran conflict
North Korea confrontation
Trade protectionism growing
US-China competition turning into a new Cold War
Brexit going badly
Eurozone troubles, especially driven by Italy and a new government
Internal Chinese instability
Global economic downturn
Major cyberattack
What political risk got right
There were some notably successful predictions on that list.
Trade wars were dismissed by some pundits at the end of 2017. Trump hadn’t torn up NAFTA as he promised and there was an assumption that his trade talk had been mostly bluster. Trade wars might be discussed, but not begun.
The political risk world was not so confident. They were proven right on January 23, when he put tariffs on solar panels and washing machines, to be followed with subsequent rounds of tariffs in March and June on steel, aluminum, and a range of Chinese products.
American soybean farmers, GM, and Ford can all attest that this risk was real and came true.
The risk world also rightly pointed out that Brexit would be a major issue throughout 2018. Between when I write this and you read it, there may have already been a move towards a second referendum, a general election, a vote of no confidence, or May’s deal passing Parliament.
In its economic and governmental impact for the world’s fifth-largest economy, it has been one of the biggest issues of the year. Again, good call.
Risks that never materialized
Much of the top risks largely didn’t happen. That’s not to say that they were wrong to be predicted, since they still major threats. But, thankfully, 2018 was full of stories of risks that never quite materialized.
North Korea may be the best example of this.
Rhetoric between Trump and Kim escalated, there was a historic summit, and a commemorative coin commissioned. Then it all went back to how it was going beforehand. North Korea has not disarmed. The United States did not launch a strike.
This may have been a near-miss, but it was in many ways it failed to be a deviation from existing trends.
Relations between the United States and Iran got worse, with Trump pulling out of the JCPOA. But it was mitigated by the rest of the world’s commitment to the agreement and no outright conflict has emerged.
In Europe, the eurozone continually threatens to have another crisis, perhaps triggered by Italy with its newly elected M5S-Lega coalition. But that is still a simmering risk, rather than a realized one.
What got missed
Although “populism in Latin America” was cited by one firm, it is fair to say that the rise of Bolsonaro was not foreseen. His first mention in Eurasia Group’s twitter feed was only on July 27, less than 3 months before he was elected. The industry’s twitter feeds were largely silent on him until just before the election.
In US politics, Trump did not tear up NAFTA, as was feared, but few anticipated just how far Mueller’s probe would advance this year or the size of Democrats’ win in the midterms.
However, all in all, this year did not see many spectacularly incorrect calls in political risk. Certainly nothing like the predictions missed before 2016 or the financial crisis.
The major stories were largely ones of new milestones in ongoing trends, such as Mueller’s sentencing memos undermining the Trump Administration, the removal of term limits consolidating Xi Jinping’s power in China, or the European Parliament voting against Viktor Orban’s policies in Hungary.
These predictions were not ignored, but were perhaps underemphasized in their speed and impact.
Lessons learned
This is the first year I’ve conducted this exercise, so I can’t say whether it was above or below average performance for the world of political risk. I also don’t wish to crown any particular firm as the best, since this is more about the field as a whole and its collective tendencies.
Some initial patterns have emerged, though.
Types of predictions
The risks predicted could arguably be broken down into three groups.
The first are the lightning strikes.
They are the cyberattacks, the country collapsing, the war spilling over, the sudden economic crash. We know that they can happen, that conditions can make them more or less likely, but we can’t predict when or where they will happen with much precision.
The second are the rickety bridges.
They are systems that are unstable and appear inevitably heading toward collapse absent a major shift. One example is the eurozone — its problems have not been solved since past debt crises and we don’t know how it will respond to another. But these systems can continue standing year after year, despite their weaknesses. Predicting them is a matter of timing as much as analysis.
The third are the downward slides.
Like the drift towards authoritarianism in many countries, they are worrying trends that show the future will be less safe than the present. But it is hard to say in advance how far down the slide we’ll go in 12 months, and whether this will be the year when something reverses that trend.
Where predictions were best
We have a very small sample size to work with, but it seems that the rickety bridges proved most accurate.
Trump acting recklessly on trade and Brexit causing parliamentary strife were not certain, but the logic of the situations were evident and led towards those ends. Yet many rickety bridges are still standing at the end of the year; it’s possible to let their instability make us forget that they don’t all collapse immediately. Bridges may look precarious, but manage to hang on year after year.
Lightning strikes are by their definition low-probability, high-impact events. Just because they did not happen does not mean that we were not right to warn about them. The industry can be doing fine here with a low batting average.
Caution for predictions
Downward slides, however, make me pause, because these seem to have been the most incorrect for a significant underlying reason.
The acceleration of trends is hard to predict. They depend on the scale of an issue, while lists of the top risks are built around the existence of an issue.
It’s therefore easier to construct a list out of possible major events (lightning strikes) or the collapse of an unstable system (rickety bridges). To say that something will steadily decline over the next twelve months is a more difficult task, especially if it’s only relevant if that decline passes a theoretical threshold that may not show up in headlines.
Nonetheless, it is good to see that risk firms are trying to look at those trends. Despite the difficulties of their prediction, they shape the global environment and create the pressures that reify the risks that dominate these lists.
Annual top risks do not have to be perfect in order to be useful, but they should also not be forgotten as soon as the calendar turns.
Note: This post was originally published on December 17, 2018