Probability distributions didn’t do a great job predicting financial meltdown, and we’re not sure they’ll be much better at predicting general events. But, since it’s not far-fetched to think that political extremes can follow economic ones, for what it’s worth, here is the political application of fat tail risk.
Risk consultancy Eurasia Group is exploring the “increasing likelihood of radical political disjunctures”, or fat tail events in national-level politics.
Here’s their synopsis:
The combination of lost savings, banking crises and credit crunches, rising unemployment, growing popular discontent with financial and political elites, and the squeeze on government services is dramatically increasing the pressures on political leaders, institutions, and stability in countries all over the world. Governments everywhere are taking steps to counteract the impact of the global crisis with efforts to ward off socioeconomic and political discontent. But countries vary significantly both in their resiliency in the face of the crisis, and in their ability to respond to it coherently and effectively.
The political impact of the crisis is anything but uniform across countries. For differing reasons, we see a great deal of resilience in some of the most important emerging powers, including China, India, and Brazil. But the unprecedented strain on political systems is creating fat tail risks for unexpected political changes in a number of major countries. In this report, we describe the top ten fat tail scenarios: significant political changes in important countries that would have been almost unthinkable six months or a year ago but are now much more conceivable. In general, these scenarios reflect the interplay between elements of the economic crisis and preexisting tensions, conflicts, and political vulnerabilties.
These fat tails are unlikely occurrences; they do not represent Eurasia Group’s mainline “calls” for any of the countries. But the potential of these events, which were very unlikely less than a year ago, now have a likelihood of 10%-30%, and, in a few cases, that number could go even higher over the next couple of years.
Those events are the following:
- Pakistan: The military returns to power, 30 per cent.
- Ukraine: Kyiv turns towards Russia, 15 per cent
- Russia: Kremlin hardliners toss out liberals, 20 per cent.
- Mexico: Corruption forces Calderon out, 10 per cent.
- Nigeria: The federation disintegrates, 15 per cent.
- Turkey: Secularists lash out, 15 per cent.
- Argentina: Kirchners fall, economic policy shifts, 15 per cent.
- United Arab Emirates: Emirates split, 10 per cent.
- Japan: Political gridlock undermines confidence, 15 per cent.
- Poland: Moving from first to last in region, 10 per cent.
You can read the scenarios in full here. (H/T reader RB)Related links:
Predicting the credit crisis – FT Alphaville
Expect the unexpected in Pakistan, Ukraine, Russia-Eurasia – Reuters
Eurasia says UAE faces “fat tail” risk on econ crisis – Wall Street Journal