Political risk costing the world economy $800 billion: Aon

Aon Corporation's Trade Credit and Political Risk practice group has calculated that uncertainty surrounding political risk cost the world economy more than $800 billion in reduced corporate spending, investments, and growth in 2003. That's compared to an estimated $200 billion prior to the September 11th, 2001 terrorist attacks on the World Trade Center. According to Aon Trade Credit's chief economist, Dr. Michel Leonard, the global cost of political risk could reach $1 trillion this year.

Leonard says that uncertainty surrounding political risk has contributed to the global economic slowdown and imposed the equivalent of a 0.25 percent "geo-political tax" on global GDP growth. "In addition to concerns over terrorism, 2003 saw the return of traditional geo-political risks such as general strikes in Nigeria, political insurgency in Venezuela, and the war in Iraq as major drivers of economic performance," he states.

Leonard says that the combination of terrorism and traditional political risks substantially decreased the risk tolerance of investors, exporters, and bankers, thus negatively impacting global trade and investment.

The impact of political risk has been particularly severe on emerging markets. For instance, Leonard says that Latin America and the Caribbean, still suffering from the aftershocks of Argentina, saw foreign direct investment (FDI) drop for the fourth consecutive year. An economic crisis in the Dominican Republic, precipitated by a $2.2 billion bank fraud, added to the region's woes.

In the US, the dollar's recent weakness makes it increasingly vulnerable to geo-political uncertainties, particularly terrorism targeting US interests at home or abroad. In contrast to what occurred in 2001, the dollar, rather than the US stock market, is likely to bear most of the negative impact in the event of new terrorist attacks on the United States.

To help organisations learn about the political and economic risks of investing in emerging markets, Aon has published its ‘2004 Political and Economic Risk Map’ rating the economic, currency and political risks of doing business in more than 200 territories worldwide. Research by Aon Trade Credit has been compiled and incorporated into a global map which is available online at www.aon.com/us/politicalrisk

•Date: 29th January 2004 •Region: N.America/World •Type: Article •Topic: Op.risk
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