Political Risk

Risks to businesses from political events. Glossary Link

Nationalization: Venezuela Chavez: Venezuela will nationalize gold mines Chavez orders nationalization of Cargill 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 Link

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

Political Instability 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 self- perpetuation. Anoncracies are by far most likely to see government threatening instability.

Link Polity IV data set

Link likelihood that the government will be destabilized or overthrown by unconstitutional or violent means

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 self- perpetuation. 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 representativeness. Link 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 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? B. POLITICAL PLURALISM AND PARTICIPATION 1. Do the people have the right to organize in different political parties or other competitive political groupings of their choice, and is the system open to the rise and fall of these competing parties or groupings? 2. Is there a significant opposition vote and a realistic possibility for the opposition to increase its support or gain power through elections? 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 representatives determine the policies of the government? 2. Is the government free from pervasive corruption? 3. Is the government accountable to the electorate between elections, and does it operate with openness and transparency? Link

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?

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World Governance Indicators 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. Link

Is Democracy a Good Thing? Yes “Democracy as a Universal Value” A.K. Sen, LinkLink 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.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).Link

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.

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: (3 rd ) Wave of democratization from 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, YashengHuang, Yasheng. Foreign Policy 167 (Jul/Aug 2008): Foreign Policy 167