Political Risk
Political Risk
Link
• Risks to businesses from political events.
Glossary
Nationalization:
Venezuela
Venezuela FDI (% of GDP)
8
7
6
5
1
-1
Link
Chavez: Venezuela will
nationalize gold mines
-2
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0
1997
Venezuelan President Hugo Chavez said Wednesday he
had ordered the nationalization of at least some of the
operations of the U.S.-based food giant Cargill and
threatened to do the same with the Caracas-based food
maker Polar
2
1996
Chavez orders nationalization
of Cargill
3
1995
Link
x
4
Currency Controls: Malaysia
• In current financial markets, many emerging
markets will impose currency controls to keep
hot money from entering the market.
• In 1998, Malaysia implemented controls to
keep foreign investors from exiting the market
forcing them to wait 1 year to repatriate
financial income. Link
Link
Political Instability
Link
Link
Regimes
• Democracy
• Autocracy: Self-perpetuating regime with
ability to strictly limit activities of political
opposition.
• Anoncracy: Regime w/o electoral democracy
but lacking means to completely eliminate
opposition or lacks direct instruments of selfperpetuation.
Anoncracies are by far most likely to see
government threatening instability.
Polity IV data set
Link
likelihood that the
government will be
destabilized or
overthrown by
unconstitutional or
violent means
Link
Regimes
• Democracy
• Autocracy: Self-perpetuating regime with
ability to strictly limit activities of political
opposition.
• Anoncracy: Regime w/o electoral democracy
but lacking means to completely eliminate
opposition or lacks direct instruments of selfperpetuation.
Anoncracies are by far most likely to see
government threatening instability.
Democracy and Growth
• Debate on political system and economic
performance has focused on the relationship
between democratization and growth.
• What is democracy? How is it measured?
What is Democracy?
• Basic aspects
(a) …basic minimum civil and political rights
enjoyed by citizens,
(b) …some procedures of accountability in
day-to-day administration under some
overarching constitutional rules of the game;
(c) … periodic exercises in electoral
Link
representativeness.
Democracy and Distributive
Politics in India
Pranab Bardhan
Measuring Democracy
• Political systems are multi-dimensional, so no
natural definition of how democratic a
country is.
• Two elements
1. Political Rights
2. Civil Liberties
POLITICAL RIGHTS CHECKLIST
Link
A. ELECTORAL PROCESS
1. Is the head of government or other chief
national authority elected through free and
fair elections?
2. Are the national legislative
representatives elected through free and
fair elections?
3. Are the electoral laws and framework
fair?
3. Are the people’s political choices free
from domination by the military, foreign
powers, totalitarian parties, religious
hierarchies, economic oligarchies, or any
other powerful group?
4. Do cultural, ethnic, religious, or other
minority groups have full political rights
and electoral opportunities?
C. FUNCTIONING OF GOVERNMENT
1. Do the freely elected head of
government and national legislative
B. POLITICAL PLURALISM AND PARTICIPATION
representatives determine the policies
1. Do the people have the right to organize
of the government?
in different political parties or other
2. Is the government free from pervasive
competitive political groupings of their
corruption?
choice, and is the system open to the rise
3. Is the government accountable to the
and fall of these competing parties or
electorate between elections, and does
groupings?
2. Is there a significant opposition vote and it operate with openness and
transparency?
a realistic possibility for the opposition to
increase its support or gain power through
elections?
CIVIL LIBERTIES CHECKLIST
D. FREEDOM OF EXPRESSION AND BELIEF
1. Are there free and independent media
and other forms of cultural expression?
2. Are religious institutions and
communities free to practice their faith
and express themselves in public and
private?
3. Is there academic freedom, and is the
educational system free of extensive
political indoctrination?
4. Is there open and free private
discussion?
E. ASSOCIATIONAL AND
ORGANIZATIONAL RIGHTS
1. Is there freedom of assembly,
demonstration, and open public
discussion?
2. Is there freedom for nongovernmental
organizations?
3. Are there free trade unions and
peasant organizations or equivalents, and
is there effective collective bargaining?
Are there free professional and other
private organizations?
F. RULE OF LAW
1. Is there an independent judiciary?
2. Does the rule of law prevail in civil and
criminal matters? Are police under direct
civilian control?
3. Is there protection from political terror,
unjustified imprisonment, exile, or torture,
whether by groups that support or oppose
the system? Is there freedom from war and
insurgencies?
4. Do laws, policies, and practices guarantee
equal treatment of various segments of the
population?
G. PERSONAL AUTONOMY AND INDIVIDUAL RIGHTS
1. Do citizens enjoy freedom of travel or
choice of residence, employment, or
institution of higher education?
2. Do citizens have the right to own property
and establish private businesses? Is private
business activity unduly influenced by
government officials, the security forces,
political parties/organizations, or organized
crime?
3. Are there personal social freedoms,
including gender equality, choice of marriage
partners, and size of family?
4. Is there equality of opportunity and the
absence of economic exploitation?
Link
Link
World Governance Indicators
Link
Voice and accountability captures perceptions of the extent to which a country's
citizens are able to participate in selecting their government, as well as freedom of
expression, freedom of association, and a free media.
Is Democracy a Good Thing?
• Yes “Democracy as a Universal Value” A.K.
Sen, Link
1. Political freedom is part of human freedom and
exercising choice is part of social life.
2. Instrumental in expression of human needs (No
democracy has ever had a famine) Link.
3. Democracy allows the exchange of information
• No, “The expansion of the right of the
individual to behave or misbehave as he
pleases has come at the expense of orderly
society. In the East the main object is to have a
well-ordered society so that everybody can
have maximum enjoyment of his freedoms.
This freedom can only exist in an ordered
state and not in a natural state of contention
and anarchy.” Lee Kuan Yew Link (see at
Proquest).
Democracy and Growth
• Most rich and developed economies are categorized
as democracies.
• Q. What is cause and what is effect?
1. Democratic Institutions Build Growth
– Non-democratic states expropriate wealth from the
citizenry
– Democratic states protect wealth and offer greater
incentives to invest.
– Evidence: European colonists implemented democratic
institutions in those colonies in which settlers expected to
live. Those colonists had the highest growth.
http://research.stlouisfed.org/publications/regional/08/04/democracy.pdf
Extractive Institutions
• Government controlled by elites who set up
institutions to extract society’s wealth.
– protected monopolies,
– forced labor
– gov’t contracts
– theft
– discrimination
• Incentives to innovate or invest are reduced.
Link
Major Outliers
In countries beset with low education
levels and heavy inequality,
democracies might encourage growth
of extractive institutions.
Link
2. Growth Builds Democratic institutions
• Modernization Theory: As economy develops
to the post-industrial stage, educated work
force and broader middle class demand a
higher level of political participation
• Evidence: (3rd) Wave of democratization from
1974-1995 occurred following advances in
education.
• Advances in education lead to changes in
value (measured by survey) placed on
political expression.
How Development Leads to Democracy What We Know about
Modernization, Foreign Affairs March/April 2009
Democracy and Growth
• Can poor countries afford democracy?
– It is clear that democracy is not a necessary
condition for economic growth.
– USA developed w/ a democratic gov’t from much
poorer levels than current developing economies.
– India grew more quickly when it became less
authoritarian in the late 1980’s.
THE NEXT ASIAN MIRACLE
Huang, Yasheng. Foreign Policy 167 (Jul/Aug 2008): 32-40.