COUNTRY RISKS

Most OECD & many non-OECD countries have GSE’s insuring FDI against political risk. Political Risk – World Bank definition: Political risks are associated with government actions which deny or restrict the right of an investor/owner i) to use or benefit from his/her assets; or ii) which reduce the value of the firm. Political risks include war, revolutions, government seizure of property and actions to restrict the movement of profits or other revenues from within a country

OECD uses a variety of macro measurements to construct country risk classification for trade credit insurance. LinkLink

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

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

Polity IV

Theories of Conflict World Development Report 2011 Chapter 2World Development Report 2011 Chapter 2 Rapid Change and Rising Expectations Voracity and Resource Curse Horizontal Inequality Lack of State Capacity Poor Institutions. Political violence associated with: Rapid Urbanization Youth Unemployment Income Inequality Weak Governance Low growth, low income countries with high natural resource share more than 10 times as likely to experience political violence.

Link

Regimes Autocracy: Self-perpetuating regime with ability to strictly limit activities of political opposition. Anocracy: Regime w/o electoral democracy but lacking means to completely eliminate opposition or lacks direct instruments of self- perpetuation. implementing a staged transition from autocracy to greater democracy. institute piecemeal reforms due to increasing demands from emerging political groups. weakened by corruption or dissension and losing their capacity to maintain strict political controls and suppress dissent.

Anocracies are by far most likely to see government threatening instability.

Global Report 2014 Conflict, Governance, and State Fragility

Link Polity IV data set

Fiscal RISKS

Debt IMF Fiscal Monitor

Crisis spreads to other countries Background Reading

Primary Deficit Simplified Government Budget Primary Revenue (less Interest Income) - Primary Expenditure (less Interest Paid) Primary Budget Deficit + Net Interest Payments on Existing Debt Overall Budget Deficit

If then Debt-to-GDP ratio stays stable. If > then deficit is “unsustainable” Sustainable Deficit A growing economy allows the government to borrow some money every year and still keep debt in line with overall GDP

Sustainable Primary Deficit If then stays stable.

Primary Balance % of GDP

Consequences of Deficits Austerity Financial Repression Seignorage Default

Link

Financial Repression Indebted governments often draw financing from captive financial institutions to keep interest rates low. Domestic banks, public pension funds Increased reserve requirements International capital controls. Link

Seignorage - Central Bank prints money to buy government debt. Link

Default Link

Final Exam Saturday, December 13 th, LG :30-3:30. Cumulative. Similar to mid-term and practice exams. Bring writing instruments and a calculator. Semi-open book – Bring 1 A4 size paper with handwritten notes on both sides. Office Hours: Standard TR 4:30-5:30 and MW 2-3:30.

Can you run a deficit every year?