How Can We Foresee Political Risks?

Foresight means peeking behind the forces that shape geopolitics. What endeavors, resources and influence mechanisms will we find? “It’s not just plain politics; it’s also about the economies, innovations and power.”

- Ahti Salo, Professor of Systems Analysis at the Department of Mathematics and Systems Analysis, Aalto University

Lately, it’s felt like the world is stumbling from one crisis to another.

We’re living in a new geopolitical world, said Finland’s new President Alexander Stubb, summing up the status quo in April 2024, during his state visit to Sweden.

We certainly are.

Professor Ahti Salo of Aalto University defines geopolitics as “a rapidly changing playground of many interests”.

Salo is a foresight expert. For decades, he has been researching and advising how organizations can best anticipate future situations in order to be prepared for them.

The aim of foresight is to provide informed views of how the future might look. It’s based on expert evaluations, statistical methods and understanding history.

Good foresight builds resilience, i.e., the ability to prepare for and cope with shocks.

Good foresight is the ability to live with the choices you make and to feel good about them

To Salo, successful foresight does not necessarily mean always hitting the mark. To him, that’s as unrealistic as accurately predicting share prices.

“It’s a bit like asking whether it’s worth taking out insurance. It might well be.”

Salo sees good foresight as the ability to live with the choices you make and to feel good about them.

“Even if new crises arise, at least you’ve tried. There has to be a level of awareness. And decision analysis helps translate this awareness into wise decisions.”

But then, after this, you have to be able to put these decisions into action. The boundary between foresight and strategic planning is that strategic planning involves choosing measures.

Foresight provides the foundations for these choices. Successful foresight is a bit like getting new glasses: you see things more clearly and in a different way to before.

I don’t think the situation can be controlled. And I don’t think this can be squeezed into a mold. But we can gain a deeper understanding of it.

A specific feature of geopolitics is constantly changing multifunctionality. New issues and surprising actors are continually popping up.

Geopolitics is more challenging to predict than even the spread of a virus, for example. A virus at least follows the laws of biology, and its spreading has no malice or any other emotion.

Salo is deliberately calm when he talks about the current geopolitical situation. Scaremongering helps no one.

In business, reflection and procrastination are often seen as a sign of uncertainty and therefore a weakness, because time is money. But now? Wrapping things up quickly isn’t necessarily the best way to do things.

“I don’t think the situation can be controlled. And I don’t think this can be squeezed into a mold. But we can gain a deeper understanding of it.”

Salo advises peeking behind the forces that shape geopolitics. What endeavors, resources and influence mechanisms will we find behind this multifunctionality?

It’s a good question, but one that has no easy answers.

“It’s not just plain politics; it’s also about the economies, innovations and power. For example, grasping a superficial understanding of the Middle East is easy, but what we should have is a deep understanding of its history and culture.”

Anguish disappears, or at least diminishes, when an organization acknowledges its foresight and resilience capabilities

Operating environments are constantly changing, but a company can have a great impact on the competition in its own sector, for example. In geopolitics it’s different: companies are the targets of actions.

“It’s like whitewater rafting. The rapids keep flowing, and you have to think how best to ride them.”

Anguish disappears, or at least diminishes, when an organization acknowledges its foresight and resilience capabilities and systematizes the process.

“This gives our boat a rudder and whatever else we need to navigate the whitewater.”

Salo himself utilizes systems analysis based on mathematical modelling. He uses mechanisms, systems and models to help him create informed descriptions of reality as the basis for decision-making. He has developed portfolio decision analysis, which involves choosing several options from among many. For example, if the task is to decide the order in which Finland’s bridges should be maintained, you have to take into account costs, profitability, safety, the use of resources, and many other factors.

However, modelling only works if the variables and terms are appropriately specified.

Having a devil's advocate can be useful

So much data and information is available that it can often cause overload. So, defining what information is considered relevant, significant, and for example, a weak signal is essential. There are no universally applicable definitions, as relevance depends on the angle from which you view something.

Salo makes whitewater rafting sound like smooth sailing when he describes how foresight is systematically embedded into the organizational structure and made part of the process in the annual plan.

It can be useful to have a devil’s advocate in the organization. You have to have the patience to listen and you also have to have the patience to avoid jargon. Salo doesn’t want to make things too fancy.

If an organization outsources its understanding and buys a report from consultants, the incidence angle may be too narrow, especially if the process of internalizing things is forgotten.

“Ultimately, organizations act according to what they understand. That’s why internalization is important.”

“You have to try to break cognitive illusions, or to at least be aware of them.”

Today’s intensified geopolitics underlines the need for contextual understanding in everything from product development onwards. Risks can go unnoticed if the organization doesn’t understand the existing infrastructure or service environment to which the contraption under development is connected. For example, very few appliances work without electricity.

“You have to understand the interfaces. Everything that needs to fall into place in that environment for the product to work.”

Horizon scanning requires enough pairs of eyes looking in different directions and the courage to question things. Otherwise, we’ll end up like the US in 1961, when when nobody had the courage to tell President John F. Kennedy that attempting an invasion of Cuba might not be wise. A terrible mess and a loss of prestige resulted from all the bootlicking.

“You have to try to break cognitive illusions, or to at least be aware of them.”

To prevent foresight from falling prey to groupthink the process must be structured systematically to ensure that differing views can come to the fore.

Salo explains how one of the evaluation processes he led involved young inexperienced researchers and a CEO level manager who had been granted an honorary title by the President for their remarkable merits in industry.

In a small country like Finland, a young person just starting out on their career might think it’s not worth challenging the views of a such powerful person too insolently. This can be overcome by organizing surveys in which views are expressed anonymously.

What about China?

China is already a challenge in terms of its time perspective. Whereas Western democracies operate on a four-year electoral cycle, in China goals may be a hundred years in the future.

- Tuuli McCully, Senior Economist, the Bank of Finland Institute for Emerging Economies

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Even if at first glance a company doesn’t seem to have a direct link to China, the country must be taken into account.

“When looking at value added statistics, it’s challenging to find any good without at least some input from China,” claims economist Tuuli McCully.

The pandemic made the world realize how dependent it is on China and how integrated production chains are. Before the pandemic, we mainly only saw the advantages of integration. Because China is so big and because it’s everywhere, it’s impossible to be completely free of it.

Instead of decoupling we need derisking, ways to mitigate the China risk.

"You can't just act in a strictly Western way"

The reason for the strained relations between China and the US is China’s desire to be the world’s technological powerhouse, which the US sees as a threat to its national security. McCully doesn’t believe that the US will be able to prevent China from becoming self-sufficient in terms of technology, no matter how many tariffs it imposes.

But it can slow down its growth.

McCully, whose area of expertise is China, has worked as the Principal Economist for the Asia-Pacific region in a major Canadian bank, Scotia Bank.

In addition to Toronto, she has also worked in Singapore. McCully’s doctoral thesis dealt with China’s deepening integration into the global economy and financial markets, and China’s relations with the world economy.

The EU is not as strict about its relations with China as is the US. The EU understands that China is an economic competitor, but stresses that the country is also such an important partner that it would not be able to manage without it. An example of this is the green transition.

“I still wonder how they can think about the world from that viewpoint. You’d have to be a sinologist to understand China even better.”

“It’s also extremely important to understand that China is a systemic competitor that promotes its own value system and social model.”

Instead of a liberal system based on the individual, in China everything starts from the common good.

“I still wonder how they can think about the world from that viewpoint. You’d have to be a sinologist to understand China even better.”

The challenge already arises in China’s time perspective. Whereas Western democracies operate from a four-year electoral perspective, in China, goals can be a hundred years in the future.

McCully has been asked whether it’s worth going to China with western values anymore. Big companies should definitely be prepared to have to deal with the Party.

“So how do we navigate it, how can we find a balance? You just can’t act in a strictly Western way.”

The China risk has no straightforward definition

Companies’ efforts to manage the China risk are most evident in the restructuring of production.

The China Plus One strategy means that companies move their production chains to other countries in addition to China. Friendshoring in turn means moving production to friendly countries.

The countries of South-East Asia have seen this as a “great opportunity”. They continue to integrate with each other while the rest of the world is turning inwards. This is why the China plus three strategy has become increasingly popular. It involves moving parts of tthe production chain to several ASEAN (Association of South East Asian Nations) countries instead of just one.

The China risk has no straightforward definition. McCully list the different risks within it.

First, there’s the macroeconomic China risk. If a country’s economy is highly integrated into or otherwise dependent on China, it will follow China’s economic cycles. McCully sees no major global macro-risk in China because, first, the country’s state-centric economic system can deal with serious growth problems when needed, and second, Chinese capital markets are still quite isolated from global capital markets.

Moreover, a slowdown in China’s economic growth is normal, as growth typically slows down when an economy is developing.

“Growth then comes more from productivity, and not from increased investment. However, China needs to grow fast because it still has millions of people whose standards of living need tobe improved.”

Then there’s the sectoral risk. For example, if a company uses highly advanced technology, it can become a geopolitical pawn.

If a large part of a company’s revenue comes from China, it’s a market risk.

And if a company’s production is highly dependent on China for supply chains, this is a production risk.

There’s also an image risk, as many geopolitical themes are linked to values.

An image risk can arise from, for example, cotton yarn. China is the world’s largest producer of cotton yarn: it accounts for around one fifth of the world’s cotton yarn production. The majority of China’s production is in Xinjiang , where it is suspected that cotton is being produced by forced-labor Uyghurs. Does this make your company’s value chains squirm?

And then there’s Taiwan. Taiwan Semiconductor Manufacturing Co. produces about half of the world’s semiconductors, specifically advanced semiconductors, and without semiconductors the world would grind to a halt.

“For the time being, it seems that both sides, China and Taiwan, want to keep a peaceful balance, as open conflict would benefit neither of them. But you never know, Chinese President Xi Jinping may want to leave some sort of legacy, for example.”