University of Southern California



Economics and Security: Political Risk Analysis

IR427

University of Southern California

Spring 2011

Tuesdays, 5-7:50, GSF 205

Dr. Pamela K. Starr

Office: STO 99 Phone: 213-740-4122

Office Hours: Email: pkstarr@usc.edu

Course Description and Content:

Governments have long understood the need to measure the relative risk of political instability and opposition as a prerequisite to the formation and implementation of an effective foreign policy. Multinational corporations with fixed investments overseas are also intimately familiar with the importance of political risk analysis to the success of their business enterprises. But in recent years the number of firms with foreign investments exploded while currency and bond traders and equity investors dramatically expanded their operations in emerging markets. These developments have broadened the recognition that politics can matter as much as economic fundamentals in measuring the degree of risk associated with a particular investment.

This course will introduce students to the analysis of political risk. It will illuminate the different aspects of political risk that affect the interests of governments, equity investors, and traders, and how the nature of risk varies among countries and regions and over time. Students will learn different methods for measuring political risk, apply these techniques to real world cases, and employ different techniques to present their findings, including stability assessments, base cases, risk maps, and probability sets (since the future can never be perfectly divined). The ultimate objective of the course is to provide students substantive knowledge and hands-on experience in assessing political risk in emerging market economies and presenting this information in written form and through oral presentation.

Requirements:

In addition to the weekly assigned readings, students are highly encouraged to read the Economist magazine every week and/or the New York Times or the Los Angeles Times daily. Students are also required to complete the assigned readings for each day prior to class and are strongly encouraged to participate actively in class discussions and exercises. Class discussions will draw on recent real world events in key emerging markets to exemplify the concepts presented in the assigned readings. These discussions and class participation more broadly are critical elements of the learning process for this course.

By the second week of class, students must choose an emerging market country from a short list provided by the instructor for which they will be an analyst throughout the term. The task of “analyst” involves five separate sets of assignments. First, students must write two short summaries of assigned readings specific to their country and they must participate in the two country scoring exercises scheduled for the second half of the course. Second, students will contribute weekly to a wiki analyzing a recent development in their country and explaining its impact on political stability and risk. Third, students will write three short reports/updates (800-1000 words) during the term analyzing political risk in their country. Fourth, all students responsible for the same country will work as a group to prepare a term project that incorporates a more complete analysis of political risk in their country. This will include a base case that identifies key downside risks, explanation of the drivers of these risks and their likely impact on stability, three probable scenarios for the future, and the implications of this risk setting for their “client”. The content and findings of this analysis will be presented as an extended essay (3000 words) preceded by a short, executive summary (300-400 words). Fifth, during one of the last two sessions of the course each country team will then present the main “takeaways” of its written report orally before a client (represented by the instructor and the rest of the class) accompanied by a well-designed power-point presentation.

To assist students in the research for these projects and their technical implementation, all students are required to participate in the Multimedia Labs that have been integrated into class meeting during weeks 3,4 & 9 of the course.

Finally, there will be a traditional mid-term examination.

Grading:

Class Participation: 5%

Wikis: 5%

Reviews: 10% (5% each)

Country Updates: 30% (10% each)

Mid-term Examination: 20%

Final Paper: 20%

Final Presentation: 10%

Required Readings:

Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic Investing, Oxford University Press, 2009.

Greg Ip, The Little Book of Economics: How the Economy Works in the Real World, John Wiley & Sons, Inc., 2010.

Inter-American Development Bank, The Politics of Policies, Economic and Social Progress in Latin America, 2006 Report, Washington, DC 2005.

Two Harvard Business School Case Studies (available for purchase on line):

“Note on Political Risk Analysis” HBS Case Study, 9-798-022, 1997.

“Note on Currency Crises”, HBS Case 9-799-089, March 1999.

National Intelligence Council, Global Trends 2025: A Transformed World, Washington, DC: US Government Printing Office, November 2008.

Course Reading List

January 11: Introduction

Mutual introductions and country selection among the following options: Brazil, China, India, Russia, South Africa, Thailand, and Turkey.

January 18: What is risk and how do we deal with it?

(Multimedia Lab 1: Doing Original Research)

Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic Investing, Oxford University Press, 2009: chapter 1-2.

Harvard Business School, “Note on Political Risk Analysis” Harvard Business School Case Study, 9-798-022, 1997.

Ian Bremmer, “Managing Risk in an Unstable World”, Harvard Business Review, June 2005: 51-60.

Sam Wilkin, “Four Experts Discuss the Science and Art of Country Analysis” in Sam Wilkin, ed., Country and Political Risk: Practical Insights for Global Finance, London: Risk Books, 2004 : 127-145.

Opinion articles on June 2009 Iranian elections to answer the question: “How did cultural biases distort initial analyses of the outcome of the Iranian elections?”

Examples of Risk Analysis:

Aon Risk Map, 2010

Eurasia Group, Risk Watch, 2007

Eurasia Group, “Fat Tails in an Uncertain World”, 27 April 2009.

Stratfor forecasts.

(3 of) “The 10 Worst Predictions for 2010”, Joshua Keating in Foreign Policy (17 December 2010)

January 25: Analyzing Politics and Policy-Making: Societal Actors

(first review of country developments due)

Jeffry Frieden, "Method of Analysis: Modern Political Economy” in Jeffry Frieden, Manuel Pastor Jr., and Michael Tomz, eds. Modern Political Economy and Latin America: Theory and Policy. Boulder, CO: Westview Press, 2000: 35-43.

Inter-American Development Bank, The Politics of Policies, Economic and Social Progress in Latin America, 2006 Report, Washington, DC 2005: chapters 1 & 5.

Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic Investing, Oxford University Press, 2009: chapter 5 (Domestic Instability).

Selections from “Burgeoning Bourgeoisie”, Economist Special Report, Economist, 12 February 2009.

Alexis Rawlinson, “The Political Manipulation of Ethnicity”, Insolens, January 2003.



Jack Goldstone, “The New Population Bomb”, Foreign Affairs, 89:1 (January/February 2010): 31-43.

Sabrina Tavernise, “Survey of Pakistan’s Young Predicts “Disaster” if Their Needs Aren’t Met”, New York Times, 22 November 2009.

________

New York Times’ country page for your country. Read to answer the question: “What were the key developments in your country over the past year?”

February 1: Analyzing Politics and Policy-Making: Political Institutions

(Multimedia Lab 2: Managing Wikis)

(second review of country developments due)

Inter-American Development Bank, The Politics of Policies, Economic and Social Progress in Latin America, 2006 Report, Washington, DC 2005: chapters 3-4.

________

Economist magazine, most recent “Special Report” on your country and either articles for your country on Council on Foreign Relations web site or the most recent articles from Current History magazine. Read to answer the question: “What are the key economic, political, and social characteristics of your country?

February 8: Geopolitics and Risk

(Wiki 1 due)

Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic Investing, Oxford University Press, 2009: chapter 3 (Geopolitics).

National Intelligence Council, “Global Trends 2025: A Transformed World, Washington, DC: US Government Printing Office, November 2008: pp. iv-xii, 1-17, and 28-59, & 76 (executive summary, introduction, and chapters 1, 3-4).

Stratfor Global Intelligence, “The Geopolitics of Pandemics”, 4 May 2009.

Stratfor Global Intelligence, “Mexico’s Cautious Economic Approach”, 16 December 2010.

Walter Molano, Emerging Market Adviser, BCP Securities: 22 June 2009, “Why BRIC?”

February 16: Understanding Markets

(Wiki 2 due)

Greg Ip, The Little Book of Economics: How the Economy Works in the Real World, John Wiley & Sons, Inc., 2010.

It is highly recommended that your read the entire book, but you absolutely must read

pp. 1-31; 45; 63; 65-119; 144; 148-162; 193-201; & 211-237.

February 22: Markets, Globalization, and Risk

(Wiki 3 due)

“The French Model”, Economist, 7 May 2009.

Navan Chanda, “What is Globalization?”, YaleOnline, November 2002 and Globalization 101, “What is Globalization”, Levin Institute.

Walter Molano, Emerging Market Adviser, BCP Securities: 8 January 2009, “Overview: Outlook for 2009”.

Walter Molano, Emerging Market Adviser, BCP Securities: 13 September 2009, “Inflationary Whiplash”, 21 November 2008, “Argentina: The Wrong Sense of Déjà vu”, and 18 August 2009, “Mexico: On the Mend”.

March 1: Mid-Term Exam

March 8: Putting it All Together: The Policymaking Milieu and Scenario Building

(Multimedia Lab 3: Managing PowerPoint)

(First country update due)

Inter-American Development Bank, The Politics of Policies, Economic and Social Progress in Latin America, 2006 Report, Washington, DC 2005: chapters 2, 6-7. Read all of chapters 2 & 7, for chapter 6 read 129-138 and skim the rest.

Therese Feng, “Domestic and External Political Factors and Country Risk: The Case of China”, in Sam Wilkin, ed., Country and Political Risk: 171-191.

Lawrence Wilkinson, “How to Build Scenarios”, Wired Magazine, 2009.

Handout on Scenario Planning.

Examples of scenario planning:

Recall Eurasia Group, “Fat Tails in an Uncertain World” from January 18.

“Iran will rattle markets in 2009”, Eurasia Group.

“Shell Energy Scenarios to 2025” Video.



Review February 8 reading: National Intelligence Council, Global Trends 2025: A Transformed World, especially pages 37, 57, 76, & 89.

March 15: Spring Break

March 22: Scoring Macro Political Risk: Exercise I

Stanley H. Kaplan, “Making an Educated Guess” in Samantha Ettus, The experts guide to 100 things everyone should know how to do, Clarkson/Potter Publishers.

Handouts on Scoring Risk.

March 29: Financial Markets and Political Risk

(Second country update due)

Reread Greg Ip, The Little Book of Economics, chapter 15.

Introduction to sovereign debt and EU bailouts:

Vlogbrothers, “The Debt Crisis Explained in Four Minutes”.

Adam Davidson and Chana Joffe-Walt, “Debt Crisis Follows Greece Getting a Second Look”, National Public Radio, Morning Edition, 14 May 2010.

The domestic politics of debt crises:

Pamela Starr, “The Politics of Exchange Rate Management in Mexico and Argentina, 1994-1995”, in P. Oxhorn and P. Starr, eds. Markets and Democracy in Latin America: Conflict or Convergence? (Boulder, CO: Lynne Rienner, 1999): 203-238.

Financial markets and political risk:

Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic Investing, Oxford University Press, 2009: chapter 4 (Political Risk and Capital Markets).

The EU debt crisis:

Marcus Walker, “EU Bailout Deal” and “Possible Paths for Europe”, Wall Street Journal, 17 December 2010.

New York Times, “Europe’s Web of Debt”, 1 May 2010.

April 5: Foreign Direct Investment and Political Risk

(Third country update due)

Going Global, “Understanding Foreign Direct Investment”.

Ian Bremmer and Preston Keat, The Fat Tail: The Power of Political Knowledge for Strategic Investing, Oxford University Press, 2009: chapter 7 (Expropriation).

(additional readings to be assigned)

April 12: Scoring Macro Political Risk: Exercise II

April 19: Student Presentations

April 26: Student Presentations

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