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Gambling on Conflict: Profiling Investments in Conflict Countries
Unformatted Document Text:  Andreea Mihalache Updated: March 20, 2008 authority, the local authority cannot always sustain the outcome: governments do not always control where bombs fall in their territory and they never control the actions of insurgent groups (hence their insurgent nature) or foreign military. Since the rule of law is reduced in cases of political violence, bargain outcomes for foreign investors are unsustainable. So, while a firm can negotiate with the government and reduce its losses when threatened with expropriation, it can rarely bargain its way out of being torched by rebel or foreign forces. In fact, many agencies such as the U.S. government’s Overseas Private Investment Corporation (OPIC) and the Multilateral Investment Guarantee Agency (MIGA) recognize political violence as a separate source of risk for foreign investors and insure them against, among other things, war damage, damage from civil strife, and damage from terrorist attacks 15 . Furthermore, among the three types of political risk covered by OPIC (political violence, expropriation, and inconvertibility), only political violence is no-fault insurance (O’Sullivan in Moran and West, 2005, p33). This means that those insured are entitled to receive benefits regardless of fault in the incident. OPIC, then, recognizes the consequences of political violence as qualitatively different from those of other types of political risk. As further evidence of the distinction between political violence and other types of risk stands the fact that political violence claims have 15 “Political risk insurance is available from an increasingly wide variety of sources. Among multilateral sources, besides MIGA, the Inter-American Development Bank (IDB), and the Asian Development Bank (ADB) are the best known. Most OECD countries have national agencies that provide domestic companies with export credit and political risk insurance. The largest among these agencies include Overseas Private Investment Corporation (OPIC) (U.S.), Export-Import Bank of the U.S., Nippon Export and Investment Insurance (formerly EID/MITI) (Japan), Export Development Corporation (EDC) (Canada), ECGD (U.K.), COFACE (France), EFIC (Australia), and C&L (Germany). The private market has grown significantly since its early days and now includes most notably Lloyd's, American International Group (AIG), Sovereign Risk Insurance Ltd., and Zurich Emerging Markets Solutions.” (http://www.mofo.com/news/updates/files/update599.html) 12

Authors: Mihalache, Andreea.
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background image
Andreea Mihalache
Updated: March 20, 2008
authority, the local authority cannot always sustain the outcome: governments do not
always control where bombs fall in their territory and they never control the actions of
insurgent groups (hence their insurgent nature) or foreign military. Since the rule of law
is reduced in cases of political violence, bargain outcomes for foreign investors are
unsustainable. So, while a firm can negotiate with the government and reduce its losses
when threatened with expropriation, it can rarely bargain its way out of being torched by
rebel or foreign forces.
In fact, many agencies such as the U.S. government’s Overseas Private
Investment Corporation (OPIC) and the Multilateral Investment Guarantee Agency
(MIGA) recognize political violence as a separate source of risk for foreign investors and
insure them against, among other things, war damage, damage from civil strife, and
damage from terrorist attacks
. Furthermore, among the three types of political risk
covered by OPIC (political violence, expropriation, and inconvertibility), only political
violence is no-fault insurance (O’Sullivan in Moran and West, 2005, p33). This means
that those insured are entitled to receive benefits regardless of fault in the incident.
OPIC, then, recognizes the consequences of political violence as qualitatively different
from those of other types of political risk. As further evidence of the distinction between
political violence and other types of risk stands the fact that political violence claims have
15
“Political risk insurance is available from an increasingly wide variety of sources. Among multilateral
sources, besides MIGA, the Inter-American Development Bank (IDB), and the Asian Development Bank
(ADB) are the best known.
Most OECD countries have national agencies that provide domestic companies with export credit
and political risk insurance. The largest among these agencies include Overseas Private Investment
Corporation (OPIC) (U.S.), Export-Import Bank of the U.S., Nippon Export and Investment Insurance
(formerly EID/MITI) (Japan), Export Development Corporation (EDC) (Canada), ECGD (U.K.), COFACE
(France), EFIC (Australia), and C&L (Germany).
The private market has grown significantly since its early days and now includes most notably
Lloyd's, American International Group (AIG), Sovereign Risk Insurance Ltd., and Zurich Emerging
Markets Solutions.” (http://www.mofo.com/news/updates/files/update599.html)
12


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