How can we assess country risks nowadays when all countries face the same global risks but are likely to respond differently to them? This has always been true, but four features make our times different. First, we are more connected to the whole, so any change in global conditions has more dramatic effects on the conditions of each country. Second, each country’s response has become more differentiated. Third, the rates of change, global and national, have become faster. Fourth, the Black Swans have become more common.

These Black Swans are the ones that cause more problems.

The black swan

On November 5, 2008, as the financial crisis that led to the Great Recession raged, Queen Elizabeth II visited the London School of Economics to inaugurate a new building. After the professors showed her the sophisticated models they taught their students, the beloved queen, no doubt pretending innocence, asked them, “Why did nobody notice it?” referring to the process that had led to the terrible crisis. As reported by the witnesses, this caught the faculty off guard. They had no answer.

A few days later, several renowned British economists sent her a letter saying:

“In summary, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks of the system as a whole.”[i]

Coming from a proud profession, the letter is surprisingly humble. The 2008 crisis was just an example of a kind of occurrence that is becoming more common—the devastating lightning striking out of the clear, blue sky. Big, unexpected events have always happened. However, they were rare. Now, they occur very frequently, not necessarily in the financial system but in many other dimensions of social life. They are becoming normal. Being normal, however, does not make them predictable. Their unpredictability is what is becoming normal.

As a result, risk assessment is becoming more complex, globally and by region. Mathematicians have noticed this. Nassim Nicholas Taleb calls these rare events Black Swans, referring to the dark bird people thought didn’t exist because nobody had seen one until one appeared in Australia. Suddenly, we are seeing more black swans than ever, but we don’t know when or where they will appear. Our problem is even worse because we don’t know if what will appear will be another black swan, or another kind of bird in a weird colour, or a lion, or a tiger—another economic crisis, a burst of inflation, a military confrontation, a dangerous victory of the extreme right or left, or an institutional debacle. All of them are equally likely to appear, or so we think. Maybe you were concerned about global warming, and then Russia invaded Ukraine, or you were guarding against an excess demand for air travel, and then, suddenly, Britain left the EU.

Welcome to the jungle of our times, where any monster may appear anytime. The jungle is unbelievably sly because monsters are not the only thing it produces. It also produces marvels and even takes away threats it had just created for you. This is also dangerous because it gives you a sense of false security. After you thought that this time Putin would scorch Europe after Ukraine’s attacks inside Russia with American and British missiles, or after you were sure that the USD 8 billion fraudulent bankruptcy of the appropriately named Samuel Bankman-Fried would lead to a chain of bankruptcies, next morning you realise that nothing terrible has happened, you lower your defences. You see that the debt of the United States has increased to the point where the interest it pays is more than defence expenditures…and nothing happens. You think, maybe things are much better than I thought, maybe borrowing ever-growing amounts is not a bad idea, maybe there is something to Bitcoin, even if there is nothing, perhaps I should get some cryptos, even if I don’t understand why they work. This increases the overall risk of the jungle. People become overconfident—or over-pessimistic.

How do you survive in this world?

You must improve your ability to assess risks.

But how do you do that if the jungle is so chaotic?

Far away from equilibrium

I don’t believe the world has become chaotic. It is far from equilibrium, which is not the same.

Society gets far from equilibrium when the pace of social change varies, like the speed of a river’s flow. Long stretches of steady, predictable flow and periods of fast, turbulent waters exist. When the flow is constant, the particles travel in an orderly fashion, aligned with each other, as if held together by the strong relationships that mark a highly organised society. The path of every particle and every layer of society is predictable. Small, weak vessels, such as origami boats, can float in calm waters, and their path can be tracked in advance. When the flow becomes turbulent, chaos replaces order, things don’t flow together, and predictability is lost. All bonds are broken by the tremendous energy of the chaotically moving waters. As the vessel leans in different directions, everything inside it jumps from one side to the other in a chaotic way. Yet, when the ship reaches the stability of a less tumultuous flow, things find a new place and a new equilibrium emerges. Then, you realise that the chaotic movements you watched were parts of reaching a new equilibrium when transitioning the rapids. The farther away from equilibrium the vessel had become, the more extended and chaotic the adjustment period.

That is what we are going through: the rapids. At the end of the rapids, the world will find a new equilibrium, though it will surely be a moving equilibrium quite different from what existed before. This new equilibrium will terminate the chaos in one of two ways: through a reinforced democracy or a tyranny.

How did we enter the rapids?

From a meander to the rapids

Only those who were adults at the turn of the millennium know how sudden the transition to the rapids was. The dawn of the twenty-first century was unsettling; it was not what we expected. The world was full of apparently justified optimism only a few years ago. The new century would be free of the ideological fights that plagued the twentieth. A global consensus appeared to solidify, affirming that free markets and democracy were the cornerstones of thriving societies. The spectre of conflict between superpowers seemed relegated to history and a transformative “new economy,” fuelled by the convergence of computing and telecommunications, emerged with such vigour that many believed it could herald the end of the cyclical economic downturns that had plagued humanity for centuries.

Globalisation would unite the world into a happy conglomerate of people who understood each other. Such optimism was not based on dreams but on realities. The world experienced a sustained economic expansion, driven mainly by the country where the new economy was first flourishing, the United States. Countries worldwide liberalised their economies and joined the ranks of democracy.

Worrying facts quickly deflated these optimistic expectations. As the new century settled in, every reason for optimism failed to deliver on its promises.

The first signal of trouble in paradise was 9/11. It was misleading, though, because, for a while, it seemed that the possibility of myriads of minor conflicts against terrorist groups would replace the focused, controllable prospect of a confrontation of superpowers. Then, a few years later, the possibility of such a confrontation was back, only worse. Thus, the world has to deal with both terrorism and the possibility of a nuclear war.

Regarding globalisation, rather than being the herald of an integrated world, it has become a bad word among large groups in developed and developing countries. Now, globalisation is backtracking into two or three big blocs, splitting Russia and China from the rest of the world. More recently, the United States has threatened to build a wall around itself and engage in trade and cooperation only when gaining in specific activities.

The conversion of most countries to liberal democracy has not produced the expected results, and many democracies have elected illiberal regimes.

Moreover, the world has suffered three financial crises in the last two decades. Income and wealth distribution are deteriorating worldwide, becoming more skewed even in the most advanced nations. A struggle for global power as pronounced as the one that led to the two world wars is already taking place.

This process started when everybody thought calm had finally arrived with the fall of communism and the Soviet Union. Barely three decades later, the world is in a destructive storm and has not found its new equilibrium.

What happened?

The origin of the rapids

The old equilibrium broke down at the end of the twentieth century due to the confluence of several currents.

A technological revolution changed the ultimate source of wealth from the multiplication of muscle power to that of the power of the mind.

There has been an explosive global encounter of cultures caused by:

• The connectivity at the core of technological transformation led to coordinating complex tasks at a distance, which is the basis of globalisation. The chains of production became global, with the participation of countries worldwide. This globalised the economy transferred industrial investments and jobs from one place to another and created economic resentment.

• The Western penetration of other cultures caused by social networks facilitated verbal confrontations that sometimes led to physical conflicts.

• A massive flow of migrations to the West created severe conflicts. Immigration has become the most common cause of political turnabouts.

These encounters threatened the cultural environments and provoked fundamentalist opposition in societies penetrated from outside—religious fundamentalism in the Middle East and nationalist in other places, including Russia, China and the West.

These events coincided with the emergence of a new philosophy that questioned the traditional values of the West and the merits of liberal democracy. Martin Heidegger emphasised race and history as crucial in the destiny of nations and people; Herbert Marcuse argued that tolerance is good but only for those he considered good and not for those he thought bad. When mixing the two, their ideas supported tribalism and racism from both the left and the right. The basis of large societies—the equality of all—weakened in favour of tribal aggrupation.

All these currents changed the behaviour of individuals worldwide, weakening the existing social order and the institutions that supported it. With the institutions weakened, the disruptive effects of the whirlwind multiplied. The existing world order, established on Western ideas centuries ago, began to show cracks and new contenders for world hegemony, such as Russia, China, and Iran, have arisen. The risk of a world war has increased, while domestic fragmentation dilutes social cohesion.

The fact that global hegemony is up for grabs has introduced new complexities as the big powers compete for the allegiance of smaller ones for economic, political, and military reasons. Each of the former currents has increased the disorder in global society. The breakdown of the global structure magnifies the divisive effects of the other currents, which could lead to chaos.

The ship of the United States has flipped so much that a Republican government, with aspirations to be considered libertarian, has chosen trade tariffs as its main policy instrument for any purpose. Tariffs are the most evident example of government intervention in the economy. Trump’s allies say they oppose interventions but apply them. Moreover, the changes in this dimension go much beyond this.

Trade tariffs would be designed to hurt both friends and foes. The first concrete policy would be against the country’s closest trade partners, Canada and Mexico, and its enemy, China [ii]. The tariffs on Canadian and Mexican products would be imposed on all products coming into the United States and would remain in place “until such time as Drugs, in particular Fentanyl, and all illegal Aliens stop this Invasion of our Country.”

The message is clear: enemies and friends will be treated the same. Everybody is served notice. Being a friend of the United States does not give any benefit.

The weakening of the West and the United States tremendously impacts developing countries. These countries have depended on the Western global order and now feel abandoned internationally. They also see the domestic erosion of democratic principles that the West supported.

Focusing on Latin America, the subcontinent is learning fast. China has become its most important trade partner, and many countries are drifting toward a still tentative political rapprochement. Populist, authoritarian regimes, and plain tyrannies dot the regions map. Regardless of how they portray themselves, from the left or the right, they go against the rule of law and erode the structure needed to sustain a prosperous society. This last action and the hubristic way it was announced will undoubtedly accelerate the trend.

This new world is much more complex than the one that existed before. The interaction of the currents described above introduces a measure of chaos that cannot be explained by examining each current individually.

Regularities

How can we assess the risks of Latin American countries and activities in this new world?

After looking at what is going on, we can advance some ideas.

First, we must understand that evaluating risks is not a learned science. The distinguished British economists who wrote the letter I quoted at the beginning of this article said that the profession’s leaders had not predicted the 2008 crisis because they lacked “imagination.” That word is never used when making scientific arguments. Risk assessment is an art. It accumulates in people, not books, which can transfer some ideas but not the whole conception of reality needed in arts. The current mathematical approach through probabilities accurately estimates the risks of standardised occurrences happening thousands or millions of times, like the number of deaths in a society in a typical year. Probabilities tell you how many deaths you could expect if you played the same year millions of times. You cannot do that with the likelihood that Putin will push the nuclear button. For that, you have only one go. As Shakespeare wrote in Macbeth: “If you can look into the seeds of time, / And say which grain will grow / and which will not, / Speak to me…”

Thus, if you rely on mathematical methods exclusively, you will live in a jungle full of Black Swans and other monsters that will appear suddenly out of an apparent normality. This doesn’t happen if you look at reality in terms of narratives of processes. The objective is, as said by the distinguished British economists, “to understand the risks of the system as a whole.” As a whole.

Once we consider the long-term processes, the Black Swans do not seem to result from chaotic surprises. They appear as the natural consequences of long-term processes. Mathematical tools can help you estimate the risks, not to calculate them mechanically. Thus, abandon your blind faith in algorithms and rely more on human experience. When assessing risks, look for processes taking place. Think of processes, not events [iii]

Second, do not rely too heavily on the experience of one discipline. Processes like those I described in previous sections involve history, economics, sociology, philosophy and many other areas of knowledge that still need to be named.

Third, start with the global processes. Risk assessment concentrated on local variables for most of the twentieth century because the global order was stable. This is no longer true. While the local environment has become more complex, the international one has become even more so. The global influence on total risks has increased dramatically. All countries are in the jungle. First, analyse what it means to be in the jungle for the assessed country and sector.

Fourth, once you have a good idea of the general risks for a region, look at the risks of the country and the enterprise, compare risks and behaviour and identify contradictions which are where sudden changes may occur. Black Swans are the manifestation of previous contradictions.

Fifth, trust small and well-prepared, diversified staff with a broad view of global risks and their impact at the enterprise level.

Sixth, say a little prayer.

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References:

[i] Dimitris N. Chorafas, Queen Elizabeth and the Economists, Springer Nature link, https://link.springer.com/chapter/10.1057/9781137332288_2 

[ii] Aime Williams, Donald Trump says he Will hit China, Canada and Mexico with new tariffs, Financial Times, November 26, 2024, https://www.ft.com/content/8b986532-df96-41d0-a13b-72fa7987c9d4  

[iii]  A branch of mathematics, nonlinear dynamics, is very helpful in analyzing processes in complex systems such as those we are discussing. Still, it cannot replace human judgment in analyzing them. For an example of their use, see Peter Turchin, End Times: Elites, Counter-Elites and the Path of Political Disintegration, Penguin Random House, 2024.