Adapting to Climate Change: Political Instability

ClimateChange_PoliticalRisk

Traditionally, political risk has meant some form of direct governmental interference such as expropriation. However, national governments are no longer the only, or in many cases the primary, source of political risk in emerging markets. Political risk can also stem from local governments, international and local NGO’s, community groups, local competitors or any other group advancing political objectives.

Moreover, more ‘soft risks’ such as poverty, human rights, labour disputes and growing income disparities can also fuel civil disturbances and conflict. The Arab Spring is perhaps a prime example where the original touch point was not due to any direct intervention on the part of the government, but was ostensibly a populous movement driven initially by high food prices.

“Future shifts in climate patterns and the resultant competition for resources will continue to have an impact on the geo-political landscape for decades to come.”

Climate change is also another ‘soft risk’ which can often ignite the touch-paper of civil unrest.

Food Affects Political Stability

The Arab Spring was undoubtedly more than just about food, but the concomitant hike in global food prices was the aggravating factor or last nail in the coffin for regimes who had failed to deliver on their social promises.

Also, it is worth noting that countries in North Africa and the Middle East import most of their food, much of which is heavily subsidised. It is no coincidence that of the top 10 wheat importers, 9 are situated in the Middle East and of those 7 had political protests resulting in civilian deaths in 2011.

As a result food inflation would have increased public spending which in turn would have further knock-on effects on the wider economy.

It’s probably a truism that as long as food is affordable, many populations may tolerate even the most despotic of regimes. But once prices get too high, above the so-called ‘threshold of instability’, then an oppressed population which then has very little to lose can very quickly rise up.

Food (and indeed water) can therefore be regarded as a form of security provided by the state, particularly in countries where it is heavily subsidised, so when food prices rise it can be regarded as a breakdown in the social contract between the state and its people. Throughout history food riots have contributed to political unrest – one only has to think of the French and the Russian revolutions.

However, whilst there is perhaps no evidence that the weather events of 2010 and 2011 were necessarily attributable to climate change or global warming, weather extremes, whilst not necessarily the cause of conflict, is a necessary component in a chain of events. In short, it can be viewed as a ‘threat multiplier’.

Globalisation has also meant that a regional climate event can have a global impact and no longer limited to the disaster’s epicentre. For example the winter drought in China and as well as the drought in Russia reduced global wheat supply and contributed to the global wheat shortage and skyrocketing bread prices in Egypt, the world’s largest wheat importer. Also, as demonstrated by the tsunami in Asia, the effects of natural hazards are truly cross-border.

Fossil Fuels Affects Political Stability

Food price volatility is, however, only one side-effect of climate change. The world’s dependence on fossil fuels will continue to debilitate the global economy. Energy prices and its supply has long been used as a political pawn as evidenced by:

  • The oil nationalisations and contract renegotiations in the Middle East during the 1970’s and 1980’s
  • The expropriation of foreign-owned assets by populist Latin American governments
  • More recently the on-going threat by Russia to cut off its gas supplies to Ukraine

Population Growth Affects Political Stability

With the world population anticipated to hit 9 billion by 2050, demand for these resources will only increase whilst the supply is simply not keeping up. Speculation on food and other commodities drives prices higher increasing profits for some but at the expense of the millions of the worlds’ poor. In the context of economies saddled by high debt, this creates a perfect storm which will guarantee high prices, eventually triggering civil unrest, for the foreseeable future.

To conclude, environmental factors are rarely the decisive factor but are a contribution to a complex interaction of other political and socio-economic factors.

What is certain, however, is that the world is entering a period of what some commentators have referred to as ‘agflation’ or inflation driven by rising commodity prices and key drivers such as food prices and population increases are here to stay.  As a result future shifts in climate patterns and the resultant competition for resources will continue to have an impact on the geo-political landscape for decades to come and companies trading or investing in emerging markets need to take adequate measures to mitigate these risks.

About Andrew Van den Born

Andrew is an Executive Director of the Financial Solutions division, specializing in the structuring and placement …
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