The economic crisis and political risk: A breeze that has yet to become a storm

Rolf Tanner, Kasper Zellweger, Simon Woodward, 18 Sep 2009

A quantitative and qualitative assessment of the key drivers of political risk in the wake of the global economic crisis.

Conventional wisdom holds that there is a link between economic difficulties and political turmoil. The template from modern history is, of course, the Great Depression, which brought the Nazis to power in Germany and triggered World War II. There are more recent examples of this pattern: the Asian crisis of the 1990s, for example, brought the fall of the Suharto dictatorship in Indonesia, the world’s fourth largest country in terms of population. Suharto’s downfall was accompanied by widespread riots and violence, eventually costing the insurance industry around USD300m.[1] Elsewhere, economic difficulties have accelerated political trends already under way: the Tequila crisis in Mexico of 1994 facilitated the transition from a de facto one party state to a democracy; in Russia, the collapse of the rouble in 1998 brought an early end to the phase of chaotic liberalisation and democratisation under Boris Yeltsin, preparing the ground for the more authoritarian and dirigiste rule of President Vladimir Putin.

Mohamed El-Erian, a former IMF deputy director and now CEO of PIMCO, a large fund manager, recently suggested that the current economic crisis is starting to undermine the credibility of the political system.[2] Albeit many major economies are now re-emerging out of recession, it is unclear whether political support for the global financial and economic system, as it has developed over the last three decades, is still strong and intact. Earlier this year, the “Financial Times” ran a series of articles on the future of capitalism. US Treasury Secretary Timothy Geithner recently vowed that “capitalism will be different.[3]

Much ink has been spilt analysing the roots of the financial crisis and economic recession. It is now high time to consider their political fall-out. This article will try to do so by focusing on four different indicators: (i) the outcome of elections in countries with democratic systems and the overthrow of regimes in authoritarian systems; (ii) the emergence of anti-capitalist political forces; (iii) government interventionism in economic and business affairs; and (iv) the level of social unrest. The collapse of Lehman Brothers in mid-September 2008 has been selected as a starting point for the analysis. This was the moment when a crisis within global finance metamorphosed into a global economic crisis. The end point of the research is early August 2009.

Elections and regime changes
In democratic systems, elections are ‘pay day’. They represent the moment when sitting governments are held accountable by their citizens for their performance over the previous term. It follows that re-electing a sitting government indicates voter contentment with the government’s performance and would want to entrust it with “four more years”. Electing the opposition into office suggests that the electorate was not satisfied with the government’s performance. In presidential systems, where the election of president and parliament may not coincide, legislative elections are an opportunity for voters to send a signal to the executive branch endorsing or disavowing the policies and performance of the president. To measure, therefore, whether the year-old current economic crisis has as yet had serious political consequences, it shall be investigated whether there has been an increase in recent opposition electoral victories. This would suggest increased voter discontent with incumbent governments, including their management of the economic crisis. The countries selected for this exercise are those rated as ‘free’ by Freedom House, an international freedom watchdog.[4]

Since mid-September 2008, there have been 30 presidential and parliamentary elections in full democracies. Of these, 15 were held in OECD- or OECD-like countries. In total, the opposition won in 16 of these cases, the incumbent government in 12.[5] Among the OECD countries, the government had a tougher time: in 9 cases, the opposition carried the day (60 %) whereas in non-OECD countries sitting governments fared somewhat better, with the opposition winning only in 7 out of 15 cases (47 %). In countries where the recession hit particularly hard, the turn against governments was strong (eg, USA, Iceland, Argentina, Lithuania, Bulgaria, Mongolia), but not uniformly so (eg, Romania, South Africa).

The fact that more than half of sitting governments were thrown out of office, or have been punished in a presidential system, would seem to indicate that there was indeed a turn against incumbents. Yet, in order to validate this preliminary assessment, a comparison must be made with electoral results in a period of comparative economic stability. As a test variable, the year of 2006 has been selected, the last year completely unscathed by the current crisis. During 2006, 39 presidential and parliamentary elections were held in free countries. Of these, 18 were in OECD countries and 21 in non-OECD countries. In total, the opposition won on 16 occasions (of which 10 OECD cases), with the sitting government or party confirmed in 18 cases (6 OECD cases).[6]





Opposition wins as % of total



+ 12%pts

Opposition wins as % OECD total



+ 4%pts

Opposition wins as % of outside OECD total



+ 18%pts

Excludes n.a. and “draw” events

Based on this data, opposition wins have increased since the crisis broke – as one would have expected. The increase is significantly higher outside the OECD; although in relative terms there has also been an increase in opposition wins within the OECD itself. Overall, the increase in opposition wins is notable, particularly outside the OECD, but not overly dramatic. Anti-incumbency has always been strong with democracies, with nearly half of the governments punished or thrown out of office even in times not marked by economic crisis.

The picture looks different for countries rated as partly free or not free by Freedom House. By their very nature and definition, authoritarian regimes cannot be ousted by the free expression of their citizens at the ballot box. In addition, authoritarian regimes tend to become even more repressive in times of economic crisis, as they fear that economic hardship increases the propensity of the population to protest. It comes as no surprise, therefore, that no authoritarian regime has been overthrown since the crisis broke, with two small exceptions.[7]

Many of the elections in partly free countries can produce a change in government, thus passing an important test of democracy. They are not, however, ‘perfect’ democracies, often as a result of having flaws in their electoral processes. One might now expect that elections in partly free countries would mimic the trend in free countries in response to the crisis, i.e., an increase in opposition wins. Yet, this is not the case. Of a total of 17 elections, the opposition saw wins in only 3 cases (18 percent). Given the flaws in the electoral processes in these countries, it seems that citizens in partly free political systems are apparently much less inclined to throw out their government than their counterparts in free countries.[8]

Emergence of anti-capitalism
If the current crisis is indeed a profound crisis of capitalism, as has been suggested, one might expect that political forces critical of capitalism would surge. Left-wing parties should benefit in democracies, regardless of whether they are currently in office or opposition. Of course, most left-wing mainstream parties in democracies today are not militantly anti-capitalist, but only mildly so, or in fact embrace capitalism even if they remain critical of some of its aspects. Still, it would seem fair to describe a left-wing victory as a move away from more free market policies to greater state control of the economy. Moreover, openly and aggressively anti-capitalist parties, which usually languish on the political fringes, should see an increase in their strength, either at the expense of their moderate mainstream competitors on the left, or in addition to them.

To measure any shift towards anti- capitalism, a sample of elections in free countries for the eleven months post September 2008 was taken. The coding of anti- and pro-capitalist was kept binary, by coding left-wing parties as anti-capitalist and right-wing as pro-capitalist. In those cases where this basic bipolarity appeared impossible, as the winning parties take an essentially populist stance, combining pro- and anti-capitalist elements in their economic policies and programmes, the win has been coded as populist.[9]

The assessment shows that pro-capitalist parties won 17 elections, anti-capitalist parties only 11 (there were two populist wins.) In both OECD and non-OECD countries, pro-capitalist parties did better than anti-capitalist ones. Even when the populists are added to the anti-capitalists, the pro-capitalists retained the majority of won elections. When opposition wins are taken into account, however, the anti-capitalists prevailed, with 8 wins against 6 for the pro-capitalists. In countries particularly impacted by the crisis, there are cases for both outcomes: eg, Iceland (a country forced to go to the IMF for aid), where the left won the elections; the moderate left also won in the US. In Central and Eastern Europe, however, voters entrusted the governing of their affairs, and thus the responsibility for managing the most severe economic crisis since the early1990s, to forces to capitalism.


Anti-capitalist wins

Pro-capitalist wins

Populist wins


















Likewise, the surge of the radical left has been very moderate up to this point. The elections to the European Parliament in June 2009, for instance, saw the alliance of radical left-wing and communist parties returned with 33 out of 736 seats –in the range of four years previously. Even in France, which has a particularly strong tradition of intellectual anti-capitalism, there were no major gains for the radical left. A newly founded Nouveau parti anti-capitaliste (Npa) brought together various revolutionary left-wing organisations – but only scored a somewhat disappointing 5 % of the votes. In Germany, it remains uncertain whether the ‘Linke’ (Left) party can benefit from the crisis and gain more electoral ground.

Thus, while opposition electoral gains have increased, there has been no marked swing to anti-capitalist parties as a result of the crisis. It is also notable that those parties on the far left with more visceral opposition to capitalism have made little headway.

Government intervention
Key tenets of capitalism are that largely private ownership of productive economic assets and keeping government intervention into the economy at a minimum are best suited to create wealth and prosperity for as many as possible. A transfer of assets to public ownership on a considerable scale would indicate growing dissatisfaction with the outcomes private ownership can produce. This dissatisfaction would be combined with the expectation that public ownership would produce better, or at least more preferable outcomes (including improving social justice). The same is true for an increase of government activism and dirigisme, including measures imposing trade barriers and restricting access to markets. It obviously makes a fundamental difference as to whether such increased government interventionism is intended to be temporary or permanent. The former would indicate that capitalism is regarded as functioning well – albeit not all the time and in need of some intervention to correct inherent flaws in certain, limited areas. The latter, that is a permanent shift towards more government control over economic affairs, would indicate that a fundamental departure from capitalism, towards a system that resembles a more socialist and autarchic model.

Measuring government interventionism in the economy poses a much greater challenge than measuring outcome of elections or swings against capitalism at the ballot box. Three different areas shall be investigated: (i) the nationalisation and government take-over of companies; (ii) restrictive or protectionist government measures taken since November 2008; and (iii) the future regulation of capitalist systems.

2008 was a dramatic year for public expansion into the private economy. It was the first year since 1981 that governments worldwide acquired more assets from the private sector than they divested to investors through privatisation.[10] Banks and other financial market players, such as insurers (e.g. AIG in the US), were de facto and de jure nationalised by governments in order to contain the effects of the financial crisis. Transfers to public ownership, however, were only one tool in a much broader arsenal of measures taken by both fiscal and monetary authorities: interest rates lowered to nearly zero percent; injections of liquidity into the markets; imposed loans; pressured mergers and take-overs, and the purchase of toxic assets and other financial paper. However, on closer inspection, most recent transfers into public ownership were measures taken only as the last resort, often with some resistance, declared as temporary and only when the collapse of a company posed a ‘systemic risk’ (which, admittedly, is a rather fuzzy categorisation invoked under stress). Most nationalisations in OECD countries have been confined to the financial sector and the auto industry. In other industries, bankruptcies as a result of the financial crisis were not prevented.

In a number of cases, nationalisations and government take-overs have already been reversed again as the global economy has stabilised. The Swiss government has stopped its financial support for the bank UBS. American banks, for their part, are keen to repay outstanding loans to regain full autonomy, and there is no resistance from the government against this plan. Overall, governments are distinctly hands-off in their ownership or emergency loans to the banks. The one area in which governments have threatened activism has been in executive compensation.

Outside the OECD, the shift towards nationalisation and government take-overs has been limited as well. Two broad classes of country can be distinguished: those with a greater dependency on foreign investors, either direct or portfolio, and those with a lesser degree of dependency, either because the state has ready access to foreign currency inflows, or because the economy relatively underdeveloped and not integrated into the global economy. The former category includes much of Central Europe, but also includes some foreign currency rich states such as China and India. The prevailing political climate in those countries has remained one of openness to trade and foreign investors (even if, in some states, many sectors of the domestic economy remain closed). In the latter category, states such as Russia have actually used the financial market crisis to strengthen and consolidate the presence of the state in the ‘commanding heights’ of the economy.[11] In other states, such as Venezuela, Bolivia, Ecuador and Nicaragua, the transfer of economic assets from private into public hands began long before and independently of the crisis; this trend has not yet abated in these countries.

A similar picture of government restraint, or limited activism and intervention, prevails with regard to trade protectionism. This caused huge damage in the aftermath of the 1929 crash. When world trade fell off a cliff in the last months of 2008 and the first weeks of 2009, anxieties grew that a similar development was in store. However, there has been no great swing to protectionism post September 2008. Global Trade Alert, a trade watchdog, has reported some, but not overly dramatic restrictions. Even in terms of currency management, there is little evidence of competitive devaluations. Sterling’s decline in 2008 caused some initial jealousy within Europe; but the pound has subsequently consolidated its position.

economic crisis

The financial crisis has generated considerable debate as to what would be suitable regulatory reform to ensure no reoccurrence of the great global liquidity crunch and the subsequent crisis. While this debate is still raging, with comparatively little of what has been proposed so far enacted, the commitment has been up to now, at least in principle has been to improve and strengthen market mechanisms, rather than to replace or abolish them. Moreover, proposed reforms have focused very much on the financial sector and the systemic risk it can pose to the wider economy. Thus, the thrust is to reduce the systemic risk to the capitalist economy – and not how to replace the capitalist economy. Even though the auto sector saw nationalisations and government intervention, there are no serious proposals on the table to fundamentally change the legal and regulatory framework for large industrial corporations. That being said, as massive fiscal and liquidity injections have provided economies with traction, the imperative for a quick regulatory response – for better or for worse – has declined.[12]

It has been perhaps remarkable, given the potential scale of the 2008 crisis, that state responses have been relatively restrained. There has been no broad swing towards protectionism; regulatory reform is still largely under debate; and those nationalisations that have occurred have been temporary and, with few exceptions, the state has been explicitly hands off in their influence over the company. Moreover, such nationalisations have remained limited to the financial and auto sectors. Within emerging markets, the strengthening of state capitalism may turn out to be less pronounced.

Social unrest and civil disturbance
Economic hardship and desperation can drive citizens into the streets and public protests. Many such protests may take the form of peaceful demonstrations, but violent and illegal acts may occur as well. Social unrest and civil disturbance can be termed political if specifically targeted against the government’s economic management, or, more generally, against the capitalist system. An increase in social unrest would indicate that the political fall-out from the crisis is mounting. In countries run by an authoritarian regime, public protests against the government are often the only indicator of recognising whether there is wide-spread discontent with government management of the crisis.

Coding social unrest poses some significant challenges. It would make little sense to identify every act of collective violence automatically as a form of politically motivated protest. There are several commercial information providers which measure social unrest and civil disturbance through quantitative indices. However, their focus is on events that cause physical damage, destroy economic assets or result in business interruptions, thus leaving aside the whole gamut of peaceful protests. Hence, any quantitative assessments must be complemented with qualitative information.

In the weeks following the collapse of Lehman Brothers there were a number of riots and demonstrations in several countries in direct response to the crisis and the measures taken by governments to fight it. This occurred in Russian and Chinese cities, but also in usually tranquil places such as Iceland and Latvia – which were both hit particularly hard by the crisis. Concerns about massive public disturbances mounted, and even in the US, articles (of an admittedly somewhat panicky character) were published on the possible use of the military to maintain public order.[13] In France, “bossnappings” – the illegal detention of bosses by workers – became popular in early 2009, while nightly riots in the run-up to the 14 July national holiday celebrations caused anxieties that the 2005 suburb riots could be repeated, though this time with a much more explicit and powerful political agenda.[14]

However, the initial riots did not snowball into a broader and more permanent wave of protests. Incidents of violent protests remained limited and isolated. Exclusive Analysis, a commercial information provider that rates the risk of civil disturbance,[15] now puts Western Europe in the second lowest category of a five category risk scale, as it does the G8 nations.

Those areas with higher levels of social unrest on the Exclusive Analysis scale include South Asia, the Middle East and in Africa. However, if there was a common contributing factor to unrest in these areas, it was sharply rising food prices over 2008, rather than the global credit crunch. Many protests were driven by primarily local factors. Presidential elections lead to prominent Iranian protests against the oppressive political and cultural character of the regime – although rising inflation was also a key concern of the middle classes, who saw their savings being worn away.

Thus, the financial crisis has only produced a limited amount of social unrest hitherto. The potential remains high, particularly as fiscal deficits are reined back in and interest rates eventually rise. Countries with well organised and pugnacious labour movements could produce future demonstrations. More obvious candidates in Europe include France, Greece and Italy, with Germany as a potential outsider. There is also the danger of scapegoats being sought for the financial crisis. In this sense, the increase of anti-Roma sentiment in Central and Southern Europe is worrying.[16]

Looking at the four indicators investigated in this assessment – the outcomes of elections; the growth of anti-capitalist sentiment; the level of government interventionism; and social unrest and civil disturbance – there has been some political fall out, but not to a dramatic level that might pose a systemic challenge both on national and international levels. This is clearly demonstrated by the two indicators that easily allow quantitative measurement, namely the outcomes of elections and the emergence of anti-capitalism. The results may be a bit more disputable and open to interpretation for government interventionism and social unrest.

Obviously, this is a preliminary assessment, on a rather limited database, and numerous caveats can be added. Arguably, taking only election outcomes as an indicator for the emergence of anti-capitalism may be problematic; opinion polls could be as indicative as well. Moreover, setting the collapse of Lehman Brothers as the starting date of the electoral survey may be too sweeping as elections held only in last October are less likely to already reflect the political consequences of this event (though arguably they already did in the early November election of the US presidency). The same goes for selecting only one year (2006) to test and validate the electoral outcomes. Much of the coding of data for the indicators is entirely based on expert judgement. While expert judgement has its strengths, and can make up for the gaps that the lack of quantitative-objective data leave, it also has a number of drawbacks and pitfalls that should not be underestimated.[17]

Moreover, the findings of this article must be put into perspective; events relating to human agency are always interdependent in their causality and subject to their own genesis.

  • Multi-causality: Why governments are voted out of office has usually a multiplicity of reasons, of which the management of a crisis may be but a minor one. The same is true when it comes to social unrest.
  • Path dependency: The political setting, ideology, history and track record of a country play a key role in shaping and channelling the political fall-out from the crisis. The memory of socialism in Central and Eastern Europe may be a strong incentive not to reject capitalism. Likewise, the reaction to the crisis can be heavily determined by the state at which the country found itself when the crisis hit. To Icelanders, the sudden change from boom to bust seems to have made things possible that were considered inconceivable only a few months ago, such as EU membership.
  • Contagion/imitation effects: Integration into an interdependent system, such as the international trade system, may mean that actions of other participants in the system restrains the ability of a government to chose its own path of action. For example, bank nationalisations in one country may lead to nationalisations in another, inflating the overall number of nationalisations. Obviously, public ownership under these circumstances is not a reaction against capitalism but an attempt to preserve the tenets of the capitalist system.

It must also be noted that it is – politically speaking – still early days for this crisis. In the 1930s, the full political effects of the Great Depression took years to materialise. Earlier research into the correlation between economic crisis and political effects has indicated the importance of time. It found that there usually is a considerable lag between the occurrence of an economic crisis and the change of governments or regime; the finding is an incubation period of 18 to 30 months. If economic crises are short, their political fall-out is very limited.[18] Therefore, if the world can quickly overcome the economic crisis, the likelihood of severe political repercussions is small. Then reports of the death of capitalism, or imminent political revolution, are, to paraphrase Mark Twain, greatly exaggerated. But should the current green shoots wither quickly again – the recession becomes a double dip or economies become trapped by low growth, high unemployment and high inflation for years, a remake of the stagflation of the 1970s – then political developments could still turn out considerably grimmer than they are currently.[19]

Rolf Tanner is Head Political and Sustainability Risk Management, Swiss Re. Kasper Zellweger is a Senior Risk Manager, Swiss Re. Simon Woodward is a Marketing Communications Editor, Swiss Re.

[1] „Political risk and insurance: challenges and opportunities in a globalised world.“ Insights. Swiss Re, 2007; p. 9

[2] “Hoher Finanzierungsbedarf von Staaten”. Neue Zürcher Zeitung, 13/7/2009, p. 13


[4] For further information on Freedom House, see

[5] OECD members plus Israel, Andorra, Liechtenstein and the EU parliamentary elections of June 2009

[6] Two electoral outcomes were coded as not available, as the distinction between government and opposition was not really applicable: the presidential elections in Palau und die EU elections.

[7] 4 cases could not be determined and 1 case has been coded as a “draw”

[8] A military coup occurred in Guinea in December 2008. In February 2009, a national unity government between opposition and government was formed in Zimbabwe after lengthy negotiations and much international pressure. Both events were the result of domestic political dynamics with no particular relation to the management of the economic crisis.

[9] A partly free country – Madagascar –was also the only one that has seen a regime overthrow through a combination of street revolution and military coup.

[10] The win of the Institutional Revolutionary Party in Mexico and of the dissident Peronists in Argentina

[11], p.3

[12] Ian Bremmer. „State Capitalism Comes of Age.“ Foreign Affairs. May/June (2009): 40-55




[16] “Civil unrest is the likelihood that protests, riots or strikes cause significant damage to assets or interrupt business operations.” Exclusive Analysis information

[17] ‚Slovakia latest flashpoint for anti-gypsy feeling’. Financial Times, August 10, 2009, p. 4

[18] For the weaknesses and flaws of expert judgement, see Philip E. Tetlock. Expert Political Judgement. How Good Is It? How Can We Know? Princeton and Oxford, Princeton University Press, 2005; xvi-321 pp.

[19] Minxin, Pei and Adesnik, Ariel David. “Why Recessions Don’t Start Revolutions.” Foreign Policy 1 April (2000): 138–51.

Download full article (PDF 173 KB)


Rolf Tanner, Kasper Zellweger, Simon Woodward

Rolf Tanner, Kasper Zellweger, Simon Woodward

Rolf Tanner is Head of Political and Sustainability Risk Management at Swiss Re.

Kasper Zellweger is Senior Risk Manager at Swiss Re.

Simon Woodward is Marketing Communications Editor at Swiss Re.


Related articles

“Stateless” Somalia and the rise of piracy

Peter Woodward, 18 Sep 2009

The lack of effective governance in Somalia has made the state particularly vulnerable to piracy. Furthermore, there are fears of a growing Islamic insurgency. With the international community reticent of any direct engagement in Somalia, it is unlikely that a durable political settlement will come into place in the foreseeable future.

The challenges today of responding to piracy and the role of the IMB Piracy Reporting Centre

Michael Howlett, 18 Sep 2009

In recent years there have been notable increases in global piracy. These increases are almost entirely due to the activity of pirates off the coast of Somalia and in the Gulf of Aden. In response to this increase in Somali piracy, a number of international navies are coordinating their efforts in attempting to provide safe passage around the Horn of Africa. Ships crews and owners are far more aware of the dangers and the preventative measures they can take. Given the prevailing anarchic political conditions in Somalia, the vigilance of merchant ships and international naval policing around the country’s coastal waters will continue to be required. The International Marine Bureau’s Piracy Reporting Centre is a key global actor in disseminating information on piracy and coordinating international responses towards it.

Piracy and its impact on the insurance industry

Hans-Rudolf Wyder, 18 Sep 2009

Global piracy has steadily increased in recent years, both in the number and severity of attacks. The increase is almost entirely due Somali pirates around he Horn of Africa and in the Gulf of Aden. The (re)insurance industry is a key player in seeking solutions to the growing threat of piracy to merchant shipping.