Coping with Sovereign Risk Since 1991


This blog article is based on Country Risk – The Bane of Foreign Investors (Springer, 2020) by Norbert Gaillard.

Both the number and percentage of countries in default reached record highs during the globalization years (1991–2016). In 1994, 114 sovereign debtors – accounting for 54% of all countries in the world – had failed to repay debt to their public or private creditors. This figure fell 10 percentage points by 2016, but it remained higher than any year during 1960–1981. Yet unlike what occurred in the 1930s and 1980s, no massive wave of sovereign bond or bank defaults was observed during 1991–2016. The explanation for this paradox involves (a) official creditors and China agreeing to restructure more sovereign debts and (b) private creditors managing to cut their losses by exploiting the new international financial architecture and a more secure legal environment.

How Official Creditors and China Absorbed Losses

In 1996, the international financial community launched the Heavily Indebted Poor Country (HIPC) Initiative in order to reduce the external debt of low-income economies. The Paris Club – as well as multilateral, non–Paris Club official bilateral, and private commercial creditors – all participated in this program. The initiative’s eligibility criteria required that candidate countries have: an unsustainable debt burden (even after obtaining traditional debt relief); a track record of sound policies through IMF- and World Bank-supported programs; cleared any arrears with the IMF, the World Bank, and the African Development Bank (AfDB); and prepared a credible “poverty reduction strategy” (see IMF 2019, pp. 7–8).

In 2005, the Multilateral Debt Relief Initiative (MDRI) complemented the HIPC Initiative. Under the MDRI, several agencies – including the IMF, the International Development Association (IDA), the African Development Fund (AfDF), and later the Inter-American Development Bank (IaDB) – committed to alleviating the debt burden of low-income economies. By the end of 2017, the total costs of debt relief to creditors under the HIPC Initiative and the MDRI were estimated at $76 billion and $43 billion, respectively (IMF 2019, pp. 12–14).

In addition to these specific programs, the Paris Club continued to reschedule and cancel the external debt of low- and middle-income economies. For all types of treatments, the Paris Club signed 248 agreements involving 79 countries during 1991–2016.

The high proportion of defaulting sovereign debt issuers in the 1991–2016 period was driven also by the many debt restructurings and write-offs negotiated by China and its state-owned banks, especially since 2000. This pattern reflects both the weak credit rating system used by Beijing and the poor credit position of its debtors – an interpretation supported by the massive defaults in 2016 of Angola, Cuba, and Venezuela on their debt to China.

How Private Creditors Limited Losses

Several of the sovereign debt crises that arose during 1991–2016 involved major, “systemic” economies. In the context of financial globalization, these shocks threatened not only private creditors but also the international financial community as a whole. In order to prevent a systemic crisis, policy makers instigated a new international financial architecture that proved to be a boon for private creditors.

This new architecture was shaped around the IMF. It became manifest in 1994 when that Washington-based institution – supported by the US Treasury and the World Bank – intervened to stop capital outflows from Mexico, thereby preventing a default and, quite possibly, a serious international financial crisis. These same players were at work in 1997 to resolve the East Asian crisis. In the following years, other bailouts were secured for major emerging countries (e.g., Brazil, Colombia, Turkey) so that they could remain solvent.

These last-resort loan interventions reduced the number of governments in default on their bond debt and cut the percentage of distressed debt owed to private creditors (i.e., among the total sovereign debt in default) from 65% in 1992 to 22% in 2011. Nonetheless, IMF economists admitted that such bailouts were likely to encourage both debtor and creditor moral hazard. Debtor moral hazard was identified in the loans to Argentina in 2000–2001 (Jeanne and Zettelmeyer 2005, pp. 79–80), and creditor moral hazard seems to account for the massive private capital inflows to Russia before its bankruptcy in 1998 (Mussa 1999, pp. 228–229).

The IMF conditionality required that distressed countries accept restrictions minimizing the problems associated with debtor moral hazard. However, a side effect of both financial globalization and the new international financial architecture is that creditor moral hazard remains a fundamental challenge for policy makers.

Another factor that strengthened creditors’ position was the enhanced legal and contractual protection of their rights. Thus, for example, the Foreign Sovereign Immunities Act of 1976 and the US Supreme Court’s statement that the issuance of debt was a commercial act (see Republic of Argentina v. Weltover, 1992) virtually consecrated the restrictive theory of sovereign immunity. This new paradigm spurred the insertion of clauses favorable to creditors in sovereign bond contracts. So starting in the 1990s, contracts were more likely to include a waiver of the sovereign’s immunity from suit and execution. Other clauses (e.g., “consent to jurisdiction” and governing law clauses) were inserted to facilitate the enforcement of sovereign debt contracts (Weidemaier 2014).

Such enforcement became uncertain when creditors doubted their status or disagreed over how best to cope with a distressed sovereign debtor. The fear of legal subordination in favor of another creditor led to a proliferation of pari passu clauses. By the same token, the need to expedite debt restructuring deals favored the insertion of so-called collective action clauses (e.g., collective modification provisions and collective acceleration provisions).

Despite these protections, bondholders have suffered some setbacks in the recent years. For instance, they were forced to accept haircuts exceeding 50% after the debt restructurings of Argentina and Greece in 2005 and 2012, respectively (Gaillard 2014, pp. x, 11). Bondholders have also encountered some coordination problems. The successful strategies followed by certain holdout creditors (e.g., the lawsuits brought by Elliott Management against Argentina) suggest that a creditor’s most dangerous opponent might well be another creditor.

Country Risk


Gaillard, N. (2014), When Sovereigns Go Bankrupt – A Study on Sovereign Risk, Springer, Cham.

International Monetary Fund (2019), Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) – Statistical Update, IMF Policy Paper, August, Washington, DC.

Jeanne, O. and Zettelmeyer, J. (2005), “The Mussa Theorem (and Other Results on IMF-Induced Moral Hazard),” IMF Staff Papers, Vol. 52, IMF Conference in Honor of Michael Mussa.

Mussa, M. (1999), “Reforming the International Financial Architecture: Limiting Moral Hazard and Containing Real Hazard,” in Gruen, D. and Gower, L. (Eds.), Capital Flows and the International Financial System, Reserve Bank of Australia, Sydney.

Weidemaier, W. M. C. (2014), “Sovereign Immunity and Sovereign Debt,” University of Illinois Law Review, Vol. 2014 (1).

stonewall palace

The Losers of the Globalization Years


Five Worst-Performing Countries

This blog article is based on “Country Risk – The Bane of Foreign Investors” (Springer, 2020) by Norbert Gaillard.

I focus here on the countries whose reputation declined significantly during the globalization years. Table 1 lists the five economies whose country risk ratings fell the most dramatically during 1988–2013, as measured by Euromoney and International Country Risk Guide (ICRG) ratings.

Table 1: Five worst-performing countries during the globalization era – according to Euromoney and ICRG

CountryDowngrades in pointsCountryDowngrades in points
Italy−30.9United Kingdom−8.0
Notes: Euromoney and ICRG ratings are established on a 0–100 scale, where 0 (resp. 100) corresponds to countries that are the most (resp. least) risky. For Euromoney, the ratings published in September 2013 are compared with those published in September 1988. For ICRG, the average ratings of 2013 are compared with those of 1988.

Sources: Author’s calculations and classifications based on Euromoney publications and ICRG database.

It is noteworthy that only 2 of the 10 worst-performing countries presented in Table 1 – Greece and Venezuela – were hit by a major shock (e.g., a major sovereign debt crisis) during the globalization era. When one considers that the countries most severely downgraded by Euromoney and ICRG are developed economies, it is clear that those countries experienced (and continue to experience) a slow decline in their economic and financial position.

60% of the worst performers are eurozone members. The raters were more concerned about the weakening of these eurozone members’ credit position than about the significance of any deterioration in their respective business climates. Japan provides a good illustration of the poorly performing countries more generally. This country was at the top of Euromoney’s rankings in the late 1980s, but its credibility faded after decades of economic stagnation, deflation, and rising debt.

Table 2 lists the five economies whose associated country risk ratings declined the most during 1995–2013, as measured by The Heritage Foundation’s Index of Economic Freedom (IEF) ratings; during 1996–2013, as measured by the Fraser Institute’s Economic Freedom of the World (EFW) ratings; and during 1999–2013, as measured by OECD scores.

Table 2: Five worst-performing countries during the globalization era – according to the IEF, EFW, and OECD

CountryDowngrades in pointsCountryDowngrades in pointsCountryDowngrades in notches
Thailand−8.3Hong Kong−0.23Lebanon−2
Notes: IEF ratings are established on a 0–100 scale, where 0 (resp. 100) corresponds to countries that are the most (resp. least) risky. EFW ratings are established on a 0–10 scale, where 0 (resp. 10) corresponds to countries that are the most (resp. least) risky. OECD country risk ratings are established on a 0–7 scale, where 7 (resp. 0) corresponds to countries that are the most (resp. least) risky. For the IEF, the ratings published in January 2014 are compared with those published in December 1994. For the EFW, the ratings published in September 2013 are compared with those published in January 1996. For the OECD, the ratings as of 1 September 2013 are compared with those as of 1 September 1999.

Sources: Author’s calculations and classifications based on the Heritage Foundation, Fraser Institute, and OECD databases.

Three fourths of worst-performing economies presented in Table 2 were hit by a major shock during the globalization era (e.g., a sovereign debt crisis or an expropriation act). The profile of these countries differs radically from those listed in Table 1. In fact, the most severe downgrades announced by the Heritage Foundation, the Fraser Institute, and the OECD involved the ratings of developing and emerging economies only.

For example, the Latin American states that opted for Bolivarian-style policies (Argentina, Ecuador, and Venezuela) as well as African countries (e.g., Zimbabwe) frightened international investors by nationalizing foreign assets. Other economies were shaken by wars, revolutions, or noxious political atmospheres (e.g., Egypt and Lebanon). One can conclude that the Heritage Foundation, the Fraser Institute, and the OECD lowered the ratings of countries in which the business climate had deteriorated the most.

Tables 1 and 2 are instructive because they reveal two distinct paths in the assessment of country risk. On the one hand, Euromoney and ICRG tend to penalize countries that are unable to preserve their credit position and competitiveness. On the other hand, the Heritage Foundation, the Fraser Institute, and the OECD tend to be ruthless when rating economies that challenge the most fundamental capitalist rules (especially the enforcement of property rights).

The Dynamics of Free Trade and FDI during the Globalization Era

Histories, Read

Multilateralism waned, but the process of trade liberalization continued.

This blog article is a short excerpt from Country Risk – The Bane of Foreign Investors (Springer, 2020) by Norbert Gaillard.

International trade went through unexpected and paradoxical changes during the globalization era (1991–2016). Multilateralism waned, but the process of trade liberalization continued. For instance, the average tariff rate for the Group of Twenty (G20) fell from 13% during 1991–1994 to 5% during 2013–2016.1 How can this evolution be explained?

After the General Agreement on Tariffs and Trade (GATT) was superseded by the World Trade Organization (WTO) in 1995, several challenges arose that rendered multilateral trade talks increasingly complex and lengthy. First, under the WTO regime, tariff rates and market-opening commitments are binding, which deters members from further liberalizing their trade policy. Second, the WTO’s admission of China in 2001 stirred mistrust among other WTO members, whatever their income level. Third, as industrialized countries had reduced their tariffs substantially during the previous GATT rounds, they had little maneuvering room left to obtain trade liberalization in emerging countries – with regard to financial services, for example. Fourth, the sustained growth of international trade in the 1990s and 2000s called into question the relevance of new multilateral talks.

In this context, it is not surprising that the Doha Round, launched in 2001, failed to achieve any trade liberalization agreements (see Cohn 2007). However, some minor progress was observed with the Nairobi Package of 2015, which removed subsidies for farm exports. In fact, other means were employed to effect trade liberalization during 1991–2016: unilateral actions, regional trade agreements (RTAs), and international investment agreements (IIAs).

Unilateral tariff cuts by several emerging countries (e.g., China, India, and Indonesia) were part of offshoring-led development strategies designed to attract foreign investments. These countries’ final objectives were to integrate themselves into global value chains, absorb knowledge and technologies, and export an even wider range of products and services.

The signing of RTAs was another feature of globalization. The number of RTAs in force rose by a factor of 5 within 25 years. However, the nature of those agreements changed significantly during that time span. Contrary to what was observed at the dawn of globalization, the bulk of RTAs signed in the 2010s were “deep” agreements. Thus, they transcend traditional tariff cuts to cover multiple policy areas: competition policy, anti-dumping measures, environmental laws, labor market regulations, and so forth (see Mattoo et al. 2017).

The boom in IIAs was certainly the most salient feature of the past three decades. These agreements, which include treaties with investment provisions (TIPs) and bilateral investment treaties (BITs), contributed to reshaping international business relations and increasing the levels of protection enjoyed by foreign investors. A typical IIA’s main provisions include protection against expropriation risk, convertibility risk, and arbitrary or discriminatory measures; they may also ensure “protection and security”, and/or “most favored nation” treatment.2

Several conclusions can be drawn from these trends in international investment rulemaking. First, they reflected the outright triumph of globalization. Second, they enabled developing countries to gain credibility. Vashchilko (2011) shows that risky economies that signed BITs managed thereby to reassure international investors, which stimulated FDI inflows. Third, the growing proportion of BITs involving exclusively low- and middle-income countries evidenced the ongoing enlargement of the group of capital-exporting nations.3 Such evolution went hand in hand with the mutation of capitalism.

The growing geopolitical tensions between China and the United States are likely to undermine such dynamics of free trade and foreign direct investment. In fact, it seems we are entering what I call the “post-globalization era” (Gaillard 2020). Post-globalization involves “a logic of high interdependence in the economic, trade, migration, and technological areas between States (and their companies) whose geopolitical interests are convergent, or at least compatible. This implies the elimination, the reduction, the selection, and/or the control of dependence and interdependence relations.” This new paradigm will oblige policy makers and economic leaders to revise radically their diplomatic, economic, and financial strategies.

1 Author calculations based on the World Bank’s World Development Indicators. The G20 comprises Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States. It accounted for more than 80% of merchandise trade in 2016 (author calculation based on

2 The “protection and security” provisions require that host countries take measures to prevent the destruction of an investor’s property.

3 About 33% of the BITs that entered into force during 2016 did not involve a high-income economy, compared with less than 12% in 1991 (see source).


Cohn, T. H. (2007), “The Doha Round: Problems, Challenges, and Prospects,” in Studer, I. and Wise, C. (Eds.), Requiem or Revival? – The Promise of North American Integration, Brookings Institution Press, Washington, DC.

Gaillard, N. (2020), “Le COVID-19, accélérateur de la post-mondialisation,” Politique Etrangère, Vol. 85, No. 3.

Mattoo, A., Mulabdic, A. and Ruta, M. (2017), “Trade Creation and Trade Diversion in Deep Agreements,” World Bank Policy Research, Working Paper 8206.

Vashchilko, T. (2011), Three Essays on Foreign Direct Investment and Bilateral Investment Treaties, Dissertation in Political Science, Pennsylvania State University.

antique antique globe antique shop antique store

The Boom of Emerging Sovereign Bond Markets during 1991–2016


A remarkable feature of the globalization era was the enhanced credit position of many emerging economies.

This blog article is a short excerpt from Country Risk – The Bane of Foreign Investors (Springer, 2020) by Norbert Gaillard.

This development is perhaps best captured by the modest growth of external debt. During 1991–2016, the public and public-guaranteed external debt of 34 major emerging countries increased (on average) by 4% annually.1 This rate was much lower than that observed during the 1960s and 1970s.

This positive evolution was driven by the relative efficiency of the macroeconomic policies implemented in these economies. Measures designed to increase domestic savings, attract FDI, boost exports, and curb inflation enabled reductions in payments imbalances and mitigated the problem of “international original sin” (Eichengreen et al. 2005).2

Figure 1 plots the composition of public and public-guaranteed external debt. After accounting for almost a third of lending to emerging economies in the 1990s, bilateral loans saw their share decline dramatically during the subsequent two decades. In the meantime, the percentage of multilateral loans stabilized. Yet the most prominent development was the resumption of sovereign bond markets. During 1991–2016, the volume of bonds issued by major low- and middle-income governments increased by a factor of 11 and their share in total public external debt quadrupled.3

Figure 1 Composition of public and public-guaranteed external debt, 1991–2016

Notes: The data set’s 40 countries have low- and middle-income economies whose total public and public-guaranteed external debt exceeded $10 billion (US) in 2016. Those countries are Angola, Azerbaijan, Bangladesh, Belarus, Brazil, Bulgaria, China, Colombia, Costa Rica, the Dominican Republic, Ecuador, Egypt, Ethiopia, Ghana, India, Indonesia, Jordan, Kazakhstan, Kenya, Lebanon, Mexico, Morocco, Myanmar, Nigeria, Pakistan, Peru, the Philippines, Romania, Russia, Serbia, South Africa, Sri Lanka, Sudan, Tanzania, Thailand, Tunisia, Turkey, Ukraine, Venezuela, and Vietnam. The data set for 1991 excludes Azerbaijan, Belarus, Kazakhstan, Serbia, South Africa, and Ukraine because of insufficient data.

Source: Author calculations based on World Bank’s World Development Indicators.

The boom in sovereign bond markets can trace its roots to the financial disintermediation of the 1980s, but it was catalyzed by the Brady Plan. This initiative – which was launched in 1989 and amounted to transforming commercial bank loans into bonds – resolved the public debt crisis and encouraged an increasing number of emerging countries to tap capital markets. The growth of foreign government bond markets was accompanied by development of a new “business ecosystem” (Buckley 1997, 2006).

The most prominent feature of this trend was the inordinate power of credit rating agencies. Ever since credit ratings were incorporated into regulatory rules and investors’ prudential guidelines, bond issuers have been obliged to obtain a rating – and the higher, the better. Higher ratings corresponded to greater investor confidence and lower borrowing costs. Credit ratings are lagging indicators, not leading indicators (Gaillard 2011, pp. 175–183; Gaillard 2014). Yet a downgrade, a review for possible downgrade, or a negative outlook is likely to exacerbate risk aversion and trigger sell-offs.4

It is noteworthy that S&P and Moody’s methodologies compel borrowers to remain solvent on their bond debt: any missed payment or (even minor) debt restructuring is considered a sovereign default and results in a downgrade to the bottom of the rating scale. In addition, CRAs frequently use the FC sovereign rating as the ceiling for FC ratings of other debt issuers domiciled within that country; hence a reduction in the former rating leads to downgrading the latter.5 This policy – which aims to account for the risk of a government restricting access to foreign exchange – highlights the importance of sovereign ratings for all borrowers.

Major financial institutions took advantage of this propitious environment to expand their operations in emerging financial markets. An illustrative example is that of JP Morgan. In 1991, the New York–based bank created a special “emerging markets” group to provide an array of services to these economies (JP Morgan 1992). Later, it launched a series of indices that track foreign currency–denominated bonds – the Emerging Markets Bond Index (EMBI), the EMBI+, and the EMBI Global – as well as local currency–denominated debt instruments (see JP Morgan 1999). More importantly, JP Morgan was the most active underwriter of emerging government bond issues during 1993–2007 (Flandreau et al. 2009).

Another group of organizations gained ground during the globalization: bondholders’ associations. In addition to the IIF and the International Securities Market Association (ISMA, established in 1969), new organizations – such as the Emerging Markets Traders Association (EMTA) and the Emerging Markets Creditors Association (EMCA) – were set up to monitor sovereign bond market activity and to promote creditors’ rights (see EMTA 2015). The IIF is certainly the most influential among these associations; its members include investment and commercial banks, insurance companies, sovereign wealth funds, asset management firms, hedge funds, and central banks.

1 Author calculation based on the World Bank’s World Development Indicators. The countries under consideration are the low- and middle-income economies whose total public and public-guaranteed external debt exceeded $10 billion (US) in 2016. Six countries are excluded because of insufficient data for 1991. The 34 countries included in this data set are: Angola, Bangladesh, Brazil, Bulgaria, China, Colombia, Costa Rica, the Dominican Republic, Ecuador, Egypt, Ethiopia, Ghana, India, Indonesia, Jordan, Kenya, Lebanon, Mexico, Morocco, Myanmar, Nigeria, Pakistan, Peru, the Philippines, Romania, Russia, Sri Lanka, Sudan, Tanzania, Thailand, Tunisia, Turkey, Venezuela, and Vietnam.

2 For example, the so-called BRIC countries (Brazil, Russia, India, and China) were especially successful in cutting the share of their public debt denominated in foreign currency or indexed to a foreign currency.

3 Author calculations based on the World Bank’s World Development Indicators.

4 The pro-cyclical effects of rating downgrades were obvious in November–December 1997 during the East Asian crisis and between December 2009 and April 2010 during the Greek debt crisis.

5 Increased financial globalization prompted Moody’s and S&P to relax their policy on this matter in the 2000s. In 2011, however, very few debt issuers were assigned a FC rating higher than that of their government (see S&P 2011).


Buckley, R. P. (1997), “The Facilitation of the Brady Plan: Emerging Markets Debt Trading From 1989 to 1993,” Fordham International Law Journal, Vol. 21 (5).

Buckley, R. P. (2006), “A Force for Globalization: Emerging Markets Debt Trading From 1994 to 1999,” Fordham International Law Journal, Vol. 30 (2).

Eichengreen, B., Hausmann, R. and Panizza, U. (2005), “The Mystery of Original Sin,” in Eichengreen, B. and Hausmann, R. (Eds.), Other People’s Money, Chicago University Press, Chicago.

Emerging Markets Traders Association (2015), EMTA @ 25 (1990-2015).

Flandreau, M., Flores, J. H., Gaillard, N. and Nieto-Parra, S. (2009), “The End of Gatekeeping: Underwriters and the Quality of Sovereign Bond Markets, 1815–2007,” NBER Working Paper No.15128.

Gaillard, N. (2011), A Century of Sovereign Ratings, Springer, New York.

Gaillard, N. (2014), “How and Why Credit Rating Agencies Missed the Eurozone Debt Crisis,” Capital Markets Law Journal, Vol.9 (2).

JP Morgan (1992), 1991 Annual Report, New York.

JP Morgan (1999), “Introducing the J. P. Morgan Emerging Markets Bond Index Global (EMBI Global),” 3 August, New York.

Standard & Poor’s (2011), “Corporate and Government Ratings that Exceed the Sovereign Rating,” 3 June.

The Boom of the Chinese Economy, A Key Factor That Upsets Country Risk


The rise of China was certainly the biggest “game changer” of the globalization years.

This blog article is a short excerpt from Country Risk – The Bane of Foreign Investors (Springer, 2020) by Norbert Gaillard.

The reforms launched by Deng Xiaoping, embodied in the 1979 promulgation of the Joint Venture Law and in the establishment that same year of the China International Trust Investment Corporation (see, respectively, Richdale and Liu 1991, pp. 125–128; Collier 2017, pp. 74–77), led to four decades of sustained GDP growth – nearly 10% during 1979–2016 – and propelled China to its position as the world’s second-largest economy.

Beijing learned from the success of newly industrialized countries yet followed its own path. It attracted FDI, managed to obtain technology transfers, and moved up in the manufacturing value chain. In addition, Chinese authorities opted for financial repression measures in order to channel growing savings toward domestic firms and to facilitate the undervaluation of its currency. These policies yielded spectacular results: between 1991 and 2016, the share of China in world trade, inward FDI stock, and outward FDI stock rose by a factor of 9, 5, and 23, respectively (see Figure 1)1. The country is now a major capital exporter and, for the first time ever, its outward FDI stock exceeded its inward FDI stock in 2016.

Figure 1 China in the world, 1991–2016

Source: Author calculations based on and the World Bank’s World Development Indicators.

This emergence of “the Middle Kingdom” reshaped the world economy as well. Several structural trends can be observed. Chinese demand led to a boom in commodity markets during the 2000s (e.g., crude oil, aluminum, copper, iron ore, soybeans), which supported economic growth in emerging countries as well as in Australia and Canada (World Bank 2009, pp. 51–73; Roberts et al. 2016).

Moreover, China’s capacity to produce and export a massive quantity of low-priced manufacturing goods had deflationary effects on the rest of the world; this dynamic has depressed the profitability of its foreign competitors and in some cases has led to their bankruptcy (Qiu and Zhan 2016, pp. 49–51).

The combination of these trends entails that emerging economies risk losing part of their industrial capabilities and also risk being confined to the production of agricultural and mining products. These downsides are a major challenge for countries seeking to diversify their economy (see Costa et al. 2016, who examine the case of Brazil).

Another aspect of China’s success was the rapid ascent of its firms in the global value chain: some of them managed to upgrade their status from subcontractor (to Japanese, US, or European MNCs) to international leader in certain sectors. Lenovo and BYD are two examples. Lenovo was Hewlett-Packard’s distributor in China in the 1990s before acquiring IBM’s personal computer segment in 2005.2 Established in 1995, BYD started out manufacturing rechargeable batteries but expanded its activities to become the world’s third leading seller of plug-in electric vehicles in 2016 – trailing only Tesla and Renault-Nissan.3

The Chinese growth model provided an alternative to liberal capitalism and thus restored the status of state capitalism in the eyes of some foreign policymakers. Beijing promoted this model and developed training programs for Asian and African officials (Kurlantzick 2016, pp. 108–114). However, such initiatives were limited by the failure of state capitalism in most countries (especially in Algeria, Argentina, Iran, and Venezuela).

1 Author calculations based on and the World Bank’s World Development Indicators.

2 See “Legend in the Making,” The Economist, 13 September 2001, and Sumner Lemon, “Lenovo Completes Purchase of IBM’s PC Unit,” PC World, 2 May 2005.

3 See M. Gunther, “Warren Buffett Takes Charge,” CNN Money, 13 April 2009 (available at, and J. Cobb, “China’s BYD Becomes World’s Third-Largest Plug-in Car Maker,” Hybrid Cars, 7 November 2016 (available at


Collier, A. (2017), Shadow Banking and the Rise of Capitalism in China, Palgrave Macmillan, London.

Costa, F., Garred, J. and Pessoa, J. P. (2016), “Winners and Losers from a Commodities-for-Manufactures Trade Boom,” Journal of International Economics, Vol. 102.

Kurlantzick, J. (2016), State Capitalism – How The Return of Statism is Transforming the World, Oxford University Press, Oxford and New York.

Qiu, L. D. and Zhan, C. (2016), “China’s Global Influence: A Survey Through the Lens of International Trade,” Pacific Economic Review, Vol. 21 (1).

Richdale, K. G. and Liu, W. H. (1991), “The Politics of ‘Glasnost’ in China, 1978–1990,” Journal of East Asian Affairs, Vol. 5 (1).

Roberts, I., Saunders, T., Spence, G. and Cassidy, N. (2016), “China’s Evolving Demand for Commodities,” in Day, I. and Simon, J. (Eds.), Structural Change in China: Implications for Australia and the World, Reserve Bank of Australia, Sydney.

World Bank (2009), Global Economic Prospects: Commodities at the Crossroads, Washington, DC.

Genealogy of Country Risk

Definitions, Histories, Read

It is difficult to determine exactly when the concept of country risk was forged. The expression was used as far back as 1967 by Frederick Dahl – then assistant director of the Division of Examinations at the Board of Governors of the US Federal Reserve System – in a research paper addressing the international operations of American banks.

Frederick Dahl states that “an appraisal of the so-called country risk inherent in any foreign credit is the major distinction between domestic and international lending. Besides assessing the creditworthiness of the individual borrower, the bank has to exercise a judgment on political, economic, and social conditions in the country of the borrower as they are likely to affect foreign exchange availabilities at the time of repayment of the loan.”

It was not until 1975–1977 that the notion of country risk began to permeate the economic literature and media. Between 1970 and 1975, the external public debt of low- and middle-income countries soared by 144%, while the share of that debt financed by Western banks climbed from 7.5% to 25%.

This growing exposure to sovereign debt began to worry the US Office of the Comptroller of the Currency (OCC). By 1977, country risk had become a buzzword among bankers and investors. In its annual report released in June 1977, the Bank for International Settlements explained that “country risks [did] add new dimensions to private banking in many ways”; this international institution added that it was “necessary to appraise a country’s overall economic and political development and to relate the data on the amount and the structure of its external indebtedness to a number of macro-economic figures, such as current and prospective foreign exchange earnings.”

Starting in 1977, however, policy makers and academics offered different definitions of country risk. Confusion spread in the following years and remains to this day. The main reason is that country risk experts do not all monitor the same risks; instead, they focus on those risks that impinge on their own respective institutions or clients.

Read more and find all quoted sources in Country Risk: The Bane of Foreign Investors (by Norbert Gaillard, Springer, July 2020).

Country Risk

Country Risk: The Bane of Foreign Investors

Agencies, Book

Country Risk: The Bane of Foreign Investors (by Norbert Gaillard, Springer, July 2020) is an original and innovative research work.

Chapter 1 introduces the key concepts.

Chapter 2 establishes that impediments to international business preceded any mention of the country risk concept. I investigate how country risk has evolved and manifested since the advent of the Pax Britannica in 1816. Four distinct periods are examined: the era of Pax Britannica (1816–1914), the 1914–1945 period, the Cold War (1945–1991), and the globalization years (1991–2016). For each period, I describe the international political and economic environment and identify the main obstacles to foreign investment.

Chapter 3 documents the numerous forms that country risk may take and provides illustrations of them. Seven broad components of country risk are scrutinized in turn: international political risks; domestic political and institutional risks; jurisdiction risks; macroeconomic risks; microeconomic risks; sanitary, health, industrial, and environmental risks; and natural and climate risks. This taxonomy includes some risks that have materialized since 1945. I also discuss how the different country risk components are factored into the business strategies of the 30 companies on which the Dow Jones Industrial Average (DJIA) index is based.

Chapter 4 focuses on what is known as “type-3 country risk” (CR3) – that is, sovereign risk. This emphasis is motivated by the high likelihood of sovereign risk, which is often equated with country risk, exacerbating all the other risks that affect international investors. I present the sovereign rating methodologies used by Moody’s, Standard & Poor’s, Institutional Investor, and Euromoney. Next, I measure and compare these four raters’ performance (i.e., their ability to forecast sovereign defaults). Finally, I identify the strengths and weaknesses of these methodologies and make recommendations.

Chapter 5 studies the various indicators used to assess type-1, type-2, type-4, type-5, and type-6 country risks (i.e., CR1, CR2, CR4, CR5, and CR6) – in other words, the risks likely to affect (respectively) exporters, importers, foreign creditors of corporate entities, foreign shareholders, and foreign direct investors. In doing so, I present the country risk rating methodologies used by six major raters: International Country Risk Guide, Credendo, the Organisation for Economic Co-operation and Development, the Fraser Institute, the Heritage Foundation, and the World Economic Forum. In parallel, I discuss eight types of shocks that reflect the main components of country risk analyzed in Chapter 3 (namely, major episodes of international political violence, major episodes of domestic political violence, expropriation acts, high-inflation peaks, deep economic depressions, significant restrictions on capital flows, sovereign debt crises, and exceptional natural disasters). Each type of shock has occurred a number of times since the early 1980s, resulting in country risk crises. Next, I measure the track records of Euromoney and the six raters in terms of anticipating these crises. Finally, I deliver a critical view of these indicators.

In Chapter 6, I summarize the findings and explain why globalization is now at a crossroads.

Read more in Country Risk: The Bane of Foreign Investors (by Norbert Gaillard, Springer, July 2020).