Global | A New Set of Structural Indicators: Geopolitical Risk and Economic Fragmentation

Summary

Typically, short-term changes in geopolitical risk are monitored by high-frequency, news-based indices, which usually revert to the mean after some time. We complement those measures by developing new structural geopolitical risk (SGR) and economic fragmentation (SEF) country-specific indices since the 1960s.

Key points

• Key points:
• We combine long time series variables such as indices of democracy, inequality, rule of law and military spending (for geopolitical risk index) and of trade and no-trade barriers capital controls and financial sanctions (for the fragmentation index).
• The principal innovation of these indices is their integration of both internal and external dimensions for each country. They consider not only domestic variables—such as rule of law or military expenditure—but also corresponding indicators for strategic partners and geopolitical rivals. External factors are weighted according to measures of geospatial and ideological distance, providing a more comprehensive and relational assessment.
• We integrate the SGR indices with other existing short-term news-based geopolitical risk indices, providing a fully comprehensive assessment of geopolitical risk in another indicator called Composite Geopolitical Risk index (CGR).
• After declining from 1960 to 2000, the GDP‐weighted global SGR index has upticked since 2000, peaking in the early 2020s, explained by internal and external institutional and political tensions, and military buildups.
• Global risk of fragmentation has been on the rise, explained by the sharp increase since 2000 in the number of trade and financial sanctions imposed by countries such as the United States, Russia, China, the United Kingdom, and Europe, thereby returning to the levels of economic fragmentation experienced in the 1990s.

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