Fresh from the press, my new copy of Risk Rules: How Local Politics Threaten the Local Economy arrived and it is really a study of unintended consequences. Authors Marvin Zonis, Dan Lefkovitz, Sam Wilkin and Joseph Yackley offer a new way to understand the global political economy.

Here are seven questions posed about the current state of affairs and the author’s answers.

1) Obviously, there’s a tremendous amount of unrest and change happening right now in the Middle East. How do the ideas in Risk Rules apply to the situation in that part of the world right now?

The uprisings taking place across the Arab world have much in common. They have been populist, leaderless, and driven by widely held frustrations over arbitrary rule, corruption, economic inequality, and a lack of democratic institutions. Yet despite these shared traits, events have unfolded in very different ways in different countries. Tunisia and Egypt saw largely peaceful demonstrations topple long-standing autocrats. Bahrain, Libya, and Syria have been wracked largely by government-sponsored violence. Then there are countries like Kuwait, Morocco, and Lebanon, which have been spared much of the turmoil. These differences are explained by the principle theme of Risk Rules — Local Factors Matter.

Many of the individual rules discussed in the book also apply. A number of the states that have experienced turmoil are in the midst of or at the edge of leadership successions. In Egypt, President Hosni Mubarak was in power for 30 years and was 83 years of age. Efforts to groom his son as his successor were widely disdained by Egyptians. The power of corruption must also be taken into account. President Ali Abdullah Saleh of Yemen has ruled for 30 years over one of the most corrupt countries in the world, according to Transparency International. Not to be forgotten is the role of religious sects in generating turmoil. The Bahraini Shiites seek more power from their Sunni ruler. The Saudis, in turn, fear the effects of the Bahraini uprising on their own Shiite people living in their Eastern, oil-producing province. Virtually every one of our Risk Rules applies to one or another country in the region’s current turmoil.

2) How has our understanding of globalization changed in the midst of global financial turmoil?

What we understand more acutely than ever before are at least two things. For one, globalization works wonders on the upside. But we now know it wreaks havoc on the downside. When the global economy was booming, the greater efficiencies generated from global supply chains accelerated economic growth. But when the downturn hit, those same efficiencies turned out to be greater decelerators of growth. So, for example, world trade fell much more rapidly than it did in the Great Depression of the 1930s. The attendant collapse of employment spread globally and contributed to a deep global recession. What we also understand is that globalization has significant effects not only on the movement of goods and capital across borders but also ideas, standards, people, and culture. Unquestionably, one of the issues inciting Islamists in the Middle East is their fear that Western culture is polluting their faith.

3) How has the collapse of global financial markets and the debt problems in America and Europe affected global business and international relations?

The global financial crisis accelerated the transition from a G-7 world to a G-20 world. In 2007, the G-7 still accounted for more than 60% of the world’s GDP. By 2012, that figure will fall below 50%. The crisis also dealt a blow to the Washington Consensus. Liberal economic models have lost some credibility, with emerging markets revisiting their strategies for economic growth. It is unclear how long this will endure, but many of the lessons being drawn from the crisis point in that direction. The economic impacts of the crisis are beginning to translate into the political arena, as well. We have already witnessed the growing political influence of China. Take Africa, for instance, where Chinese investments are buying friends, some of whom it is willing to shield from international criticism. It will, no doubt, expect the favor to be returned. In 2010, we saw Brazil and Turkey strike out on their own and sign a deal on Iran’s nuclear program. For business, the crisis has turned a cliché into a truism: if you want to realize high returns on your investment, you must look to the developing world. But in doing so, you would do well to keep the Risk Rules in mind.

With respect to debt, the great boom occurred with the lubricant of OPM, Other People’s Money. Individuals and families in the U.S., for example, vastly increased their consumption not through earned income but through debt. At the peak of the U.S. boom, Americans were consuming 72% of their GDP while household debt had built massively. Part of the boom was created by the absurdly low interest rates of the U.S. Federal Reserve Bank and partly by the flood of money flowing in from China, which enjoyed huge surpluses generated by vast exports to the U.S. The U.S. “crash” put the damper on rabid consumption, the chief stimulus to U.S. economic growth. Government stimulus made up for some of the drop in demand, as did an increase in exports. But not enough. The U.S. economy plunged. As the global economy rebalances – through lower consumption in the U.S. and less reliance on exports in China — global economic growth will be restored. But this will be a lengthy process. It will be an especially difficult process in certain countries, particularly in Europe, where governments have sought to increase growth by slashing government spending.

4) Understanding the culture of emerging markets can stave off political and economic disaster. Can it also set countries and businesses up for big improvements, or gains?

Risk Rules tries to make clear that understanding the local culture is critical to business success. Companies that seek to do business the same way in a different country often fail. If they do not fail, they clearly do not enjoy the success that would be offered by being aware of how people think and understand the world in the other country. We tell the fascinating (and depressing) story of how Microsoft failed in Korea because it failed to understand the immense cultural significance of the Hangul system of writing and its integral connection to Korean nationalism. The newspapers regularly carry stories of other companies that failed for a failure to work within the constraints and opportunities of other countries. Mattel and Best Buy, for example, recently closed stores in Shanghai after failing to understand local practices.

5) Are there countries and/or businesses that are deftly attending to the risks of emerging markets?

As we understand from the research of behavioral economists, much of the rush into emerging markets has been the product of herd mentality — a company deciding it absolutely has to be in country X or country Y because its competitors were there or the CEO heard about the opportunities there from fellow CEOs on the golf links. They did not particularly understand the risks and did not, in many cases, particularly succeed. But many, many companies have been strikingly successful in emerging markets. Ranbaxy, the Indian drug manufacturer; Samsung, the Korean electronics manufacturer; and HSBC, originally a Hong Kong Bank, have all used their expertise in their home markets to adapt to the cultures of other countries, with great success. Unilever, Coca-Cola, IBM, P&G, Intel, HP are only a few of the global behemoths that have figured out how to operate successfully in many different emerging markets.

6) How has big business tended to misread the different risks of emerging markets?

The simple assumption that people are people and, therefore, will be attracted to the same products at the same prices and the same work methods and the same work relationships as exist in a company’s home country is at the root of business failures in other countries, and not just failures in emerging markets. What is necessary instead is for companies to understand the culture — how local people understand the world — of the countries a company seeks to enter. It may be challenging to adapt one’s processes and products. But it is possible, has been done by other companies on countless occasions. If done right, it can be massively profitable.

7) There are a lot of “crisis” stories in this book. Are there reasons to think globalization can work for emerging markets, despite these? If so, how?

Globalization has certainly worked for emerging markets in the sense that many companies from emerging markets have become global brands. Whether it is Toyota or Sony; Samsung or Hyundai; Haier or Huawei; Embraer or Brahma — and the list could go on, companies from emerging markets have increasingly benefitted from their successes in the global economy. This has matched the successes of companies from the developed world in the emerging markets. In other words, the global economy is no longer a one-way street. But flows are everywhere and increasingly global.

Risk Rules: How Local Politics Threaten the Global Economy is published by Agate 2011 and available now (May 3rd launch date).

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