Global shocks gave no respite in this year 2023. After a decade marked by the covid-19 pandemic, a supply chain crisis, and the outbreak of the war between Russia and Ukraine, The last twelve months have once again highlighted the highly uncertain, dynamic and complex external context.
In March, we experienced a series of bank failures in the US, a product of the hidden risks of the new normal of high interest rates, which shook the global financial system.
Seven months later, the most devastating terrorist attack in Israel's history unleashed another war whose implications for global security and politics will only be fully evident in the coming years and decades.
In mid-December, the Houthis, a Yemeni rebel group backed by the Iranian government, began launching drone and missile attacks against commercial ships transiting the Red Sea, a critical point for global shipping. This group, probably unknown to most companies on this side of the world, has an arsenal of weapons superior to most Latin American countries, and few political restrictions when using it.
In response to this, The US, British, and French governments and other world powers have deployed a fleet of highly advanced warships. They seek to avoid a new global trade crisis and the domestic political reaction that it would bring.
Although these events have diverse causes and impacts, they are all manifestations of the current moment of “global misgovernance.” The world is moving from the unipolar system under US hegemony that prevailed after the Cold War to a new global structure that has not yet been consolidated.. The truth is that the institutional framework for dealing with global issues and the provision of global public goods by the US—two pillars of the unipolar system—long ago ceased to be a source of stability.
At the same time, the world faces a panorama of increasingly complex risks due to phenomena such as the unstoppable advance of digital technology, climate change, and the deterioration of democratic systems. The pace of disruptive change continues to accelerate. The above requires clear and predictable mechanisms to manage risks, manage tensions, and organize collective action at a global level.
Indeed, the gap between the demand for global governance and the capacity of the current system to provide it is high and growing. This situation will continue to generate external shocks, unexpected disruptions, and unprecedented challenges for the global economy and business environment in 2024.
What are the implications for Latin America and the business environment in the region?
The influence of intermediate powers
The great rearrangement in geopolitical matters increases the ability of the so-called middle powers to exert influence—countries like Argentina, Brazil, Mexico, and (why not?)—Colombia too. The weakening of the institutions and rules that have governed the international trade and investment system for decades increases its room for maneuver to implement protectionist policies that prioritize domestic public policy objectives over the rights of investors.
The escalation of rivalry with China makes the US more pragmatic and flexible in its relations with governments in the region, increasing the negotiating power of Latin Americans against the two great powers.
While this scenario can bring benefits—for example, necessary and pending reforms to the governance of multilateral institutions—also generate regulatory risks for companies. Latin American governments—from diverse ideological backgrounds—will be increasingly willing to implement extraordinary taxes and tariffs, as well as new requirements for local content, technology transfer, data localization, national residency, and other conditions on the activities of multinational companies.
This trend will be especially marked in strategic industries for the energy transition such as critical minerals and renewable energies where global competition further increases the negotiating power of Latin American governments.
Climate change and energy transition
The energy transition itself, and the climate change that forms its background, represents the second key factor marking the business environment in the region in the coming year. There is no doubt that decarbonization represents a huge opportunity for Latin America and Colombia due to their mineral wealth and clean energy sources as well as their great capacity to provide solutions based on nature.
However, this context also implies great challenges for the public and private sectors in the region. The first has to do with establishing an appropriate balance between different public policy objectives: promote decarbonization without neglecting energy security, guarantee environmental protection without discouraging private investment. The second corresponds to the social and institutional challenges that companies will face to make investments in critical minerals and renewable energies.
Complex relationships with local communities and cumbersome administrative processes are holding back projects in these sectors throughout the region.
Finally, vulnerability to climate events will be a factor that will not only generate increasing operational disruptions but will also amplify political, social, and regulatory risks for companies.
Technology's progress
The third implication has to do with digital disruptions. The digitalization of companies in the region has advanced at a much greater pace than the development of public policies and internal controls to guarantee data security. At the same time, the digital risk landscape is becoming increasingly complex due to the rapid incorporation of tools such as artificial intelligence in cyber attacks, as well as the proliferation of threat actors with political and geopolitical agendas and state support. These two factors are aggravated by the current context of global misgovernance.
Faced with this scenario, Governments in the region are racing against the clock to catch up, generating a torrent of projects, initiatives and strategies to guarantee digital security. In Colombia there are currently no less than six bills moving through Congress that address these issues, including two different proposals to create a new national digital security agency.
While the intention is good, there is a clear risk of establishing overly restrictive rules that prevent private investment in the technology sector.
Regardless of what governments do, companies themselves will have to strengthen their security and data protection protocols to ensure compliance with national and international standards and avoid operational disruptions and reputational damage associated with cyber attacks.
'Risk management overload'
The final implication is that all of the above can easily lead to risk management overload, creating a “meta risk.” cross-cutting for companies and organizations in 2024. Private and public sector leaders will have to work overtime to stay on top of increasingly diverse and dispersed sources of risk, and so many events of global importance.
It is evident that the causes of potential disruption for a company in any country in the regioneven if their operations are limited to the national market, they have multiplied, diversified, and become more complex. Managing this scenario requires clear and comprehensive risk management plans, sophisticated risk monitoring systems, and the strategic incorporation of technological tools in these functions.
The next 12 months will surely be an example of this reality. The year 2024 will bring elections in more than 70 countries, including the world's three largest democracies—the US. USA, India, and Indonesia—as well as geopolitical flashpoints like Russia, Ukraine, and Venezuela. Those responsible for risk management should take advantage of these days at the end of the year to rest a little.
THEODORE KAHN
SPECIAL FOR THE WEATHER
DIRECTOR, GLOBAL RISK ANALYSIS AT CONTROL RISKS
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