Root Causes and Consequences of Political Risk: Defining Political Risk and Its Various Dimensions
This chapter defines the concept of political risk as well as its main consequences. Political risk involves the unexpected unfavorable consequences of the arbitrary exercise of power by a government and its domestic and foreign ramifications, as well as by nongovernmental actors. This chapter identifies a range of approaches to anticipate the rise of instability in rapidly changing societies, both in developed and emerging market countries. A key theme here is that country’s sociopolitical volatility is rooted in a lag between the development of its socioeconomic system and that of its political-institutional system. Country Risk stems from a slow process of political and institutional modernization with institutions that are not capable of managing the stress of socioeconomic change. The chapter concludes with a discussion of political instability that is driven by institutional weaknesses in the process of social mobilization in countries that experience fast socioeconomic change.
KeywordsPolitical risk Sovereign risk Legal risk Corruption Wealth gap Expropriation Nationalization
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