Although there are many methods of measuring sovereign risk there are few standard means of assessing risks as it pertains to violence, conflict and instability. We know many societal factors are adversely affected through higher interpersonal violence, terrorism, rising political instability, crackdowns on social, political and religious freedoms as well as increasing inter-state conflict. Similarly, improvements in social conditions and the economy can have a positive effect on peacefulness. Consequently, by analysing the interconnectivity between violence and societal dynamics, it is possible to develop risk estimates that improve on the accuracy of the existing techniques currently used and deepen our understanding of those factors which underlie peaceful and prosperous societies.
Recognizing this, the Institute for Economics and Peace has developed a new approach to assessing country risk as part of the 2014 Global Peace Index Report ‘Measuring Peace and Assessing Country Risk.’ By combining risk theory and quantitative analysis IEP has implemented frameworks to operationalise a series of risk models. The approach places a significant focus on understanding the trajectory and development of the long term institutions which support peace and observing how particular combinations of societal strength or ‘Positive Peace’ interact with violence and conflict.
The current approach, and resulting ‘Risk Scores’ have proven to be reliable in identifying the countries that were at risk and subsequently fell in peace. IEP Risk Scores can therefore be interpreted as the likelihood of a country deteriorating in peace in the presence of a trigger factor.
Broadly, IEP’s research found that the countries that will be at the most risk of economic loss, violence and societal breakdown tend to have lower levels of ‘Positive Peace’, the term used to describe the structures, attitudes and institutions that move society towards resolving conflict in a non-violent way. Nations with low levels of Positive Peace are less likely to remain flexible, ‘pull together’ and rebound in the face of crisis.
In fact, many of the societal factors defined by IEP that support peace also support the Shared Societies agenda of creating a society in which “people hold an equal capacity to participate in, and benefit from, economic, political and social opportunities regardless of race, ethnicity, religion, language and other attributes, and where, as a consequence, relations between the groups are peaceful…”.
Furthermore, IEP’s research found that not only do countries with stronger institutions have lower risks of experiencing an increase in violence over the next two years, but that democracies face the lowest risks. Specifically, it was found that the risk tends to be higher in regimes where there tends to be a deficit in political and social freedoms. In addition, it was found that although full democracies experience small deteriorations in peace, the likelihood of full democracies experiencing larger deteriorations is much lower. This has been illustrated in Figure 1 and 2.
Figure 1: Average Risk by Regime Type of a Small to Medium Deterioration in Peace
The results of IEP risk modelling show that hybrid regimes are the countries with the highest likelihood of a small to medium deterioration in peace.
Figure 2: Average Risk by Regime Type of a Large Deterioration in Peace
In contrast with other government types, full democracies have negligible likelihood of suffering large deteriorations in peace. Authoritarian regimes are more likely than Flawed democracies to experience large deteriorations in peace.
Although the human costs of higher levels of violence provides a striking illustration of the importance of strong and accountable institutions, so too does the economic implications of peace. For instance, using IEP’s Global Violence Containment model, estimates were made of the economic impact of the projected falls in peace. From this the overall financial impact of a small to medium rise in violence was found to be greatest in South Korea, Indonesia and Argentina. Such an increase in violence would be equivalent to US$3.8 billion, US$3.7 billion and US$2.0 billion respectively.
However, perhaps most alarmingly, IEP estimated that 16 countries, or over 500 million people, live in countries with an IEP Country Risk score of more than 50, indicating a higher chance of experiencing a small to medium deterioration in peace over the next two years. For instance, if Angola, Myanmar and Papua New Guinea were to experience a ‘small to medium’ deterioration in peace they would experience an increase in their violence containment costs equivalent to $31.0, $10.6 and $10.3 per person respectively.
Although the findings provide a powerful illustration of the potential financial impacts of violence, one of the most important insights is the benefits that could be obtained through governments targeting policies which build Positive Peace. This is because, not only is excess expenditure in areas such as the military fundamentally unproductive, but by freeing up these resources more can be invested in activities such as health, education and infrastructure which encourage economic growth and improve wellbeing. In addition, societies which are peaceful, socially cohesive, stable and safe are undeniably worthwhile in and of themselves; they also make economic sense, with research by IEP consistently finding that more peaceful societies are also more resilient and prosperous.
The Institute for Economics and Peace (IEP) is an independent, non-partisan, non-profit research organization dedicated to shifting the world’s focus to peace as a positive, achievable, and tangible measure of human well-being and progress.
You can read more about the findings discussed in this blog by clicking here.
Global Peace Index interactive map: http://bit.ly/GPI2014
Global Peace Index report: http://bit.ly/GPIreport
Global Peace Index Video: http://bit.ly/GPIvideo
