Resource Security and Corruption: Risk Multipliers in an Interconnected World

Global risks’ are those risks that are not confined to one region and which have the potential to spread across countries, regions and continents to affect business in all parts of the world. However, the resilience of society, strength of governments and flexibility of business have major implications for the impact of global risks. The rapid evolution of interconnections between societies and countries in recent decades has accentuated the capacity of these risks to interact with each other in complex and unpredictable ways.

The maps presented in this article explore the relationships between resource security and corruption, and consider how the conflation of these risks can pose threats to business – particularly for those operating in emerging economies where the business environment is predominantly unstable. It is the conflation of these risks, rather than the individual risks themselves, which poses the greatest threat to business operating in a connected world.

The relationships between risks are sometimes obvious, such as poverty forcing economic migration, but more subtle links also exist where one element can act as a ‘risk multiplier’. This article considers the combined impact that corruption and decreasing food, water and energy security have had in inflating the risks of civil unrest and political uprisings, such as that seen during the Arab Spring.

The similarities and differences between the risk landscape in the Middle East and north Africa (MENA) region and China also reveal the importance of risk mitigation and management. The actions taken by the government to increase food security and reduce corruption among local officials have helped prevent the small-scale protests seen in China from escalating to national upheaval seen in the MENA region.

Resource Security as a Global Risk

The availability of clean water has been hailed as one of the key challenges facing businesses in the 21st century by the World Wide Fund for Nature (WWF)1 and poses significant operational, financial, regulatory and reputational risks to business. A secure, reliable and affordable energy supply is key to economic growth, providing both energy for business, as well as fuelling consumer demand for the myriad electronic devices available today. Food security also poses risks to business, not only from the perspective of the health of the workforce and local community, but also in terms of the political and financial impacts of increasing food prices and the potential for food riots and civil unrest.

These risks not only conflate, but also are interdependent. For example, the extraction and processing of fossil fuels for energy is a water-intensive process. Energy in turn, is also used to power machines to irrigate, fertilise, harvest, process and transport crops, while energy intensive desalination plants produce fresh water across water stressed regions. The growing use of biofuels as an alternative energy source is also impacting food supply, as farmland is turned over to these more profitable crops, which in turn can require more water to grow.2

When found alongside other risks, the rising cost of food and energy can contribute to triggering displacement, social unrest, and political upheaval. Competition for productive farmland can also increase the risks of conflict on both a small and large scale. These risks are set to increase in the future as the effects of climate change become more evident and pressure on natural resources increases.

The UN Security Council recently considered the possibility of including climate change as one of the security risks that would fall under the remit of the UN peacekeepers and described it as a ‘threat multiplier’.3

The figures presented in this explore some of the interrelatedness between resource insecurity and corruption.

 

Figure 1: Resource Security: A Combination of Maplecroft’s Food Security, Water Security and Energy Security (Short-term) Indices

Source: Maplecroft

 

Those countries shaded in red or orange are those that suffer extreme or high risk alternatively from poor water, food and energy security. Somalia and Afghanistan are at particular risk, exemplified by the recent famine affecting the Horn of Africa and Somalia in particular. The MENA region is highly water stressed with the worst conditions found in Bahrain, Qatar, Kuwait, Saudi Arabia, Yemen and Libya. This in turn impacts food security and is forcing these countries to purchase farmland in other countries to grow sufficient food. For example, in 2009, Libya was reported as securing 100,000 hectares for rice production in Mali, and in 2008 Egypt secured land to grow 2m tonnes of wheat per year in Sudan.4

Although the oil producing states of the MENA region are relatively energy secure in the short term, the lack of water could pose significant risks to the water-intense energy production lifecycle in the future. In turn this could significantly affect their economies as the competing factors of water for consumption, agriculture and industry collide.

Resource Security and Corruption

The combination of rising food and energy prices has contributed to a general dissatisfaction with the standard of living in some MENA countries. This is made worse by corruption and lack of job prospects for an unemployed and disenchanted educated youth. Although protests were also triggered by factors such as repression by a brutal police force, some of the first riots of the Arab Spring were labelled as ‘bread riots’ as people took the streets in Algeria and Tunisia to protest against food prices.

Resource security issues such as these are key multipliers of other risks, including corruption. In this respect, resource insecurity and high food prices amplified popular anger over corruption and the brutality of the police forces, providing greater impetus to the protests.

Figure 2: Maplecroft’s Business Integrity and Corruption Index

Source: Maplecroft

 

Figure 2 shows Maplecroft’s Business Integrity and Corruption Index (BICI), which assesses the prevalence and persistence of corruption in the public and private sectors as well as the efficacy of government efforts to combat corruption.

The conflation of resource insecurity, corruption, poor governance and other risk factors, such as high unemployment and a large youth demographic that is educated with few job prospects, can be seen as significant motivators for the Arab Spring.

High levels of corruption existed within the political leadership in several MENA region countries. For example, the former Tunisian President Zine el- Abidine Ben Ali faces charges of money laundering and drug trafficking; Egyptian President Hosni Mubarak faces charges of corruption; and the corruption of the political leadership has contributed to political turmoil in Syria and Yemen and outright civil war in Libya. These countries are all at extreme or high risk of corruption, according to Maplecroft measures, as well as face significant risks of resource insecurity.

Although the long lasting after effects of the Arab Spring are far from apparent, as the existence of powervacuums is a key factor in stability, in the short-term, the conflict and political violence seen as a result of the uprisings has crippled the economies of Libya and Syria; whilst tourism and foreign investment have fallen in Egypt, Tunisia, Bahrain and other MENA countries. As an N11 country, Egypt was previously considered one of the world’s most successful growth economies.

However, estimates of growth in fiscal year 2010/2011 were slashed from between 3.5% and 4.8% to between 1.5% to 2.2% following the unrest.5 The impact of the instability was felt in the tourism sector with companies reporting a 35% decline in revenue in the first half of 2011 compared to the same period in 2010.6 Tourism provided 11% of Egypt’s GDP in 2010 and although a quick recovery is expected, this has placed pressure on the Egyptian economy and the 2.8 million Egyptians who are directly or indirectly employed by the tourism sector.

The possibility of the contagion of instability, essentially a domino effect, places companies operating in other countries in the region at risk and the effects for supply chains must also be considered. Particularly evident is the effect on the price of oil. The European Brent Spot price rose from US$95 at the start of 2011 to over US$126 at the beginning of May 2011, as production in Libya was reduced and fears of unrest in Saudi Arabia grew. This was a significant rise that some commentators argue could act as a drag on economies still recovering from the global financial crisis.

Following the protests in the MENA region, calls for a similar revolution in China were voiced as pro-democracy protests were organised in several cities. However, these calls failed to draw significant support and China is unlikely to follow in the footsteps of regimes in the MENA region in the short to medium term. Although China suffers from similar problems of corruption, resource security, poverty and lack of freedoms, the protests in China are focused on local issues and against local authorities lacking the cohesion of the national actions in the MENA region.

The effectiveness of China’s security services also acts as a deterrent for mass unrest. A crack down on possible democracy activists, lawyers, artists and bloggers in China began even before the calls for protests emerged with arrests, detentions and restrictions of freedom being employed to stop protests. Blocks on internet access and social media tools were also tightened ahead of the protests.

Unlike Egypt and other MENA regimes, the Chinese government has also been pragmatic in recognising the need to address the issues that shape or form popular discontent on an ongoing basis. Sustained economic growth and rising minimum wages have resulted in improving standards of living, and although poverty and income disparity remain key challenges, recent years have seen an improving trend.

A survey conducted by the Pew Global Attitudes Project found that, in 2010, 87% of those surveyed were happy with the direction of the country, an important increase from 48% in 2002 (although some may say the degree of honesty in answering the survey is debatable).

Corruption in China is also largely decentralised, as reflected in the local nature of a majority of protests, limiting the risks of a national movement. The Chinese government is attempting to manage these risks and has promised to address corruption concerns. There has been a crackdown on corruption among government local officials and a 52-point code of ethics for local governments was released in February 2010, which could further improve the public perception of the levels of corruption within China.

Although China has thus far not seen the kind of social unrest as has been seen in the MENA region, this is not to say that a combination of these risks is an insignificant challenge for businesses with interests in China. In Egypt the middle class, which played a key role in the unrest, comprise a higher percentage of the population than in China. The Chinese middle class has also been less politically active to date, although recent protests over the planned extension of Shanghai’s Maglev Line give a taste of the property-rights issues that worry the Chinese middle class.

As the world’s most populated country and a major industrialising economy, China requires ever greater amounts of energy to sustain growth and support the increasing energy consumption from all sectors of society, not least the growing middle classes.

Despite extensive use of hydroelectric power, consumption of both coal and oil are predicted to increase in China for the foreseeable future, leaving China vulnerable to pressure to reduce greenhouse gas (GHG) emissions on the global stage, as well as struggling to provide energy for all the people on a local platform.

The relationship between water and energy is highly evident in China and a fine balance exists between energy and water security, particularly in the water-stressed northern areas of China. For example, water scarcity forced the closure of a coal-to-liquid processing plant in Ordos in Inner Mongolia. The US$4bn refinery, which mixed water and other chemicals with water, was closed in April 2011, as the competition for the scarce water grew.

Similar to the MENA countries, China is reducing risk of water scarcity and increasing their own energy security by leasing land in less water-stressed countries such as Zambia, Mexico and the conflict-torn Democratic Republic of the Congo (DRC). Chinese firms have been reported as signing a contract to grow 2.8 million hectares of palm oil in the DRC and requesting 2 million hectares to grow Jatropha in Zambia, both of which are used as biofuels.

Global Risks as Opportunities

To fully appreciate and manage global risks businesses need to be aware both of the individual risks, but also of the locations and situations where these risks conflate. Beyond this, companies need to understand the complex interplay of these risks and how to manage or take advantage of the opportunities they may present.

Innovative risk analysis tools and interactive mapping are one way of assessing and screening risks at a global level, as well as highlighting the areas where these risks combine or have the potential to rapidly multiply.

However, to fully manage the risks and find opportunities in a connected world, businesses need to project and plan further ahead, considering structural and longer-term societal risks, broadening their worldview to include risks that may not be immediately apparent. By doing this, companies can better identify the opportunities that accompany the high risk environments, and can anticipate the risks and thus flourish.

1WWF (2009). Understanding Water Risks
http://assets.wwf.org.uk/downloads/understanding_water_risk.pdf

2UNCTAD (2011). Price Volatility in Food and Agricultural Markets: Policy Response. http://www.unctad.org/en/docs/2011_G20_FoodPriceVolatility_en.pdf

3Guardian, 2011. UN countries divided over Security Council climate role. http://www.guardian.co.uk/environment/2011/jul/21/un-security-councilclimate-change

4IFPRI, (2009) ‘Land Grabbing’ by foreign Investors in Developing Countries: Risks and Opportunities. http://www.ifpri.org/sites/default/files/publications/bp013all.pdf

5Ahramonline, (2011), What’s next for Egypt’s Economy? http://english.ahram.org.eg/NewsContent/3/0/10682/Business/0/Whats-next-for-Egypts-economy.aspx

6The National, (2011). An economic awakening to match season of change.

 

 

 

 

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