2.6 introduction to geopolitics

Question 1

Geopolitics

Answer 1

the study of how political decisions and international relations are influenced by geography

Question 2

Geopolitical risk

Answer 2

the potential for events such as policy changes, natural disasters, or terrorism to disrupt the normal and peaceful course of international relations

The objective of this reading is to develop a framework for assessing and measuring geopolitical risk and incorporating this analysis into investment decisions

Question 3

two axes of geopolitcal risk

Answer 3

Cooperation vs. Non-cooperation

Globalization vs. Nationalism

Question 4

Decisions about managing exposure to geopolitical risk can be made by two types of actors

Answer 4

state actors and non-state actors

Question 5

state actors

Answer 5

possess the authority to deploy a country’s national security resources

possess the authority to deploy a country’s national security resources

Question 6

cooperative country

Answer 6

engages with others, seeking reciprocal relationships based on transparent, standardized rules and norms

This relationship dynamic increases trust over time, allowing for greater mobility of capital, goods, services, and technology.

Question 7

non-state actors

Answer 7

include companies, non-governmental organizations (NGOs), and influential individuals who participate in global political, economic, or financial affairs

Question 8

non-cooperative country

Answer 8

characterized by inconsistent, arbitrary rules and retaliation.

This dynamic leads to mistrust and limitations on trade, migration, capital flows, and technological exchanges.

Question 9

A country’s geophysical resource endowment

Answer 9

includes the geographic features that are needed for sustainable growth.

Question 10

Standardization

Answer 10

the process of establishing uniform protocols and rules for the production, sale, and delivery of products and services.

Governments and non-state actors are motivated to work toward standardization because these efforts are often essential to overcoming challenges that limit cross-border economic and financial activity.

Question 11

soft power initiatives

Answer 11

Governments seek to exert non-coercive influence through soft power initiatives, such as cultural and educational exchanges, travel grants, and advertising.

Question 12

Institutions

Answer 12

broadly defined as established organizations or practices within a society

Question 13

Which of these is likely lowest on a country’s hierarchy of interests?

A
Tariff harmonization

B
Military determination

C
Cultural program development

Answer 13

C
Cultural program development

Cultural program development is likely lowest on a country’s hierarchy of interests. Military determination (B) is often a primary source of national security and key to a country’s national interest. Tariff harmonization (A) may improve economic activity and improve cooperation. Cultural programs are important and influential but likely lower priority compared to A and B.

Question 14

Globalization

Answer 14

broadly defined as countries opening their economies to increase their integration with the global economy.

Question 15

There are three primary motivations for non-state actors to participate in globalization.

Answer 15

Increasing profits

Access to resources and markets

Intrinsic gain

Question 16

Foreign direct investment (FDI)

Answer 16

the acquisition of physical productive assets, involves a longer-term commitment.

Question 17

Costs of Globalization and Threats of Rollback

Answer 17

Unequal Accrual of Economic and Financial Gains

Lower Environmental, Social, and Governance Standards

Political Consequences

Interdependence

Question 18

While a complete reversal of globalization is extremely unlikely, companies are using the following tactics to strengthen their supply chains while adapting to evolving conditions.

Answer 18

Reshoring the essentials

Re-globalizing production

Doubling down on key markets

Question 19

The framework that has been developed in this reading includes two axes:

Cooperation/Non-Cooperation
Globalization/Nationalism

Within the parameters of this framework, we can develop four models that actors can adopt:

Answer 19

Autarky: Nationalism and Non-Cooperation

Hegemony: Globalization and Non-Cooperation

Multilateralism: Globalization and Cooperation

Bilateralism: Nationalism and Cooperation

Question 20

Autarky

Answer 20

An autarkic regime exerts strong centralized influence or control over technology, goods, services, and media.

Strategic industries are typically controlled or dominated by state-owned enterprises, which serve as extensions of the government.

This model has been cited as a part of a stepping stone approach that countries such as China have used to transition toward more open economies and societies.

However, the autarky practiced by North Korea and Venezuela has resulted in stunted economic and political development.

Question 21

Hegemony

Answer 21

The hegemonic model is typically adopted by regional (or global) leaders seeking to leverage their influence to exert control over resources.

Key export industries are often dominated by state-owned enterprises. Other countries can benefit by adopting the hegemon’s standards.

However, these benefits can be lost if the hegemon’s global influence wanes.
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Examples of countries that have followed this model include the United States and Russia.

Question 22

Multilateralism

Answer 22

The multilateralism model involves engaging in mutually beneficial trading relationships with extensive harmonization of rules.

Singapore, a prime example of this model, has little choice but to trade with the rest of the world due to that country’s limited geography and natural resources.

However, despite these limitations, Singapore is located at the intersection of several important trade routes, and multinational firms are attracted by its highly skilled, English-speaking workforce.

The country enjoys the benefits of stable political institutions, low levels of perceived corruption, and policies that rank highly with respect to ease of doing business.

However, this level of integration with the global economy can leave Singapore exposed to geopolitical risks.

Question 23

Bilateralism

Answer 23

Bilateralism is similar to multilateralism, but this model calls for countries to engage with other countries on a one-at-a-time basis.

Japan employed a bilateral model to develop trading relationships during the early stages of the country’s export-driven post-war economic development.

However, countries typically find it impractical to maintain purely bilateral relationships.

In practice, countries commonly adopt an approach called regionalism which falls between bilateralism and multilateralism on the spectrum and involves cooperating with countries within a regional bloc

Question 24

tate-owned enterprises most likely feature prominently in which of the following archetypes from the geopolitical risk framework?

A
Autarky only

B
Autarky and Hegemony

C
Autarky and Bilateralism

Answer 24

B
Autarky and Hegemony

Question 25

The tools used by state and non-state actors in pursuit of their geopolitical objectives can be classified into three categories:

Answer 25

National security tools

Economic tools

Financial tools

Question 26

National Security Tools

Answer 26

national security tools are used by governments with the intention of coercing another country to take certain actions.

Question 27

Economic Tools

Answer 27

Economic tools typically take the form of multilateral trade agreements. They include broad-based agreements on tariff harmonization among World Trade Organization (WTO) members, as well as agreements that are limited to countries within the same region, such as MERCOSUR, the South American common market.

Question 28

Economic tools

Answer 28

Using economic tools often requires countries to act cooperatively, for example, with other members of a common market or a currency union

Question 29

Financial Tools

Answer 29

ike economic tools, financial tools often involve cooperation between countries. For example, governments and non-state actors are active participants in the global currency market, which facilitates foreign investment. Sanctions, capital controls, and restrictions on currency trading are examples of non-cooperative financial tools.

Question 30

Multi-Tool Approach

Answer 30

The political, economic, and financial systems covered in this section are often intertwined

Question 31

Geopolitical risk can be classified into three types:

Answer 31

Event risk

Exogenous risk

Thematic risk

Question 32

Event risk

Answer 32

refers to uncertainty surrounding date-specific milestones (e.g., elections, new legislation) that can be known in advance.

These events often bring about changes in a country’s geopolitical positioning and the prioritization of its objectives. Investors typically develop a consensus view about the likely outcome of planned events, which gets incorporated into relevant asset prices.

However, this consensus may not reflect what ultimately occurs, as was the case in 2016 when asset prices adjusted sharply after the United Kingdom voted to leave the European Union.

Question 33

Exogenous risk

Answer 33

the possibility of sudden, unanticipated developments that impact a country’s cooperative stance and/or the ability of non-state actors to participate in globalization.

These are also known as black swan risks because they relate to events that are extremely rare and highly unpredictable.

Examples include sudden military action or natural disasters, such as the tsunami that damaged Japan’s Fukushima reactor, leading several European countries to announce plans to phase out their use of nuclear power.

Question 34

Thematic risk

Answer 34

are known, but they expand and evolve over time.

Climate change and the ascent of populist political movements are examples of thematic risks.

Cyber attacks are an illustrative example because, while they have been a risk for many years, they have increased significantly in recent years in terms of their size, scale, and sophistication.

Question 35

When assessing any particular geopolitical risk, investors must consider the following factors:

Answer 35

The likelihood of occurrence

The velocity (speed) of impact

The size and nature of impact

Question 36

Discrete impact risks

Answer 36

relate to specific companies or sectors

Question 37

broad impact risks

Answer 37

have the potential to affect investment performance on a national or even international scale

Question 38

scenario analysis

Answer 38

likely outcomes are developed for a range of potential circumstances. This process often requires a combination of qualitative and quantitative analysis

The objective of scenario analysis is not only to track risks but also to provide a plan that can be executed as events unfold.

When scenario analysis is performed by a team, it is important to avoid a groupthink consensus that discourages individuals from sharing diverse views.

Question 39

A signpost

Answer 39

an indicator that a particular risk is becoming more or less of a possibility

Question 40

the Geopolitical Risk Index (GPR)

Answer 40

invented by US Federal Reserve

a metric of real-time geopolitical risk perception among journalists, investors, policymakers, and the general public

Question 41

three key observations of the Geopolitical Risk Index (GPR)

Answer 41

High levels of political risk reduce US investment.

The negative impact on investment is greater in response to idiosyncratic geopolitical risk events.

Threats of adverse events had a greater impact than adverse events themselves.