The Root Causes and Consequences of Political Risk: From Bad Governance to Wealth and Political Power Concentration and Social Instability

Abstract

This chapter addresses the root causes of sociopolitical instability. It explores the theme that economic growth must be coupled with socio-institutional flexibility to stem the tensions that arise from unequal income distribution and large wealth gaps both within and between countries. The chapter further analyses the close correlation between corruption and unfavorable business conditions, as well as between corruption and income inequality. It concludes by identifying the various measures of political risks and by the need for risk analysts to look at the power structure of countries to identify the root causes of potential social upheaval. Ratings and rankings can never be substitutes to in-depth analysis backed by a wide range of information sources.

Appendix 10.2 Concise Survey of Academic Literature Regarding the Relationships Between Country Risk Stability, Institutions, Democracy, and Socioeconomic Development

Author	Topic	Relationships democracy, development, and country risk stability	References
Acemoglu, Daron and Robinson, James	Why nations fail	Openness of a society, its willingness to permit creative destruction, and the rule of law are decisive for economic development. Countries escape poverty only when they have appropriate economic institutions, especially private property and competition. In consensually strong states, politicians and political elites are weak, and citizens give them a “long leash” in the economy, consenting to high taxes, regulation, and involvement by the state, with the expectation that the politicians in power and the bureaucrats will work for the citizens’ benefits	Crown Publishing Group, NY, 2012
Acemoglu Daron Johnson, Simon and James, Robinson	The colonial origins of comparative development	Differences in colonial experience could be a source of differences in institutional development. The feasibility of European settlement stemmed from differences in mortality rates. European colonization has led to institutions that enforced the rule of law and encouraged investment, or to extractive states and social systems that were detrimental to economic progress	NBER, Working Paper series no. 7771, June 2000
Acemoglu, Daron and James, Robinson	The role of institutions in growth and development	Institutions are collective choices that are the outcome of a political process. The economic institutions of a society depend on the nature of political institutions and the distribution of political power in society. The main determinants of differences in prosperity across countries are differences in economic institutions. Success and pitfalls of institutional reforms are keys to solve the problem of development and poverty	Commission on Growth and Development, Working Paper no. 10, The World Bank, 2008
Acemoglu, Daron, Suresh Naidu, Pascual Restrepo, and James Robinson	Democracy does cause growth	Democracy has a significant positive effect on GDP per capita: democratizations increase GDP per capita by about 20% in the long run by encouraging investment, increasing schooling, inducing economic reforms, improving public good provision, and reducing social unrest	NBER Working Paper no. 20004, March 2014, revised May 2015
Alesina, Alberto and Giuliano, Paola	Culture and institutions	Culture, including trust, family ties, individualism, and generalized morality, and institutions, including political and legal institutions, regulation, and the welfare state, interact and evolve in a complementary way, with mutual feedback effects on the speed of development and wealth	NBER Working Paper series no. 19750, December 2013
Barro, Robert J.	Democracy and growth	Favourable effects on growth include rule of law, free markets, small government consumption, and high human capital. But the net effect of democracy on growth performance cross-nationally is negative or null. Many countries have become rich under authoritarian auspices. Democracy enhances growth at low levels of political freedom	Journal of Economic Growth 1:1–27, March 1996
Depetris-Chauvin, Emilio	State history, contemporary conflict: evidence from sub-Saharan Africa	Regions with long histories of statehood are better equipped with mechanisms to establish and preserve order. They are less prone to experience conflict when hit by a negative economic shocks	Pontifical Catholic University of Chile. https://ssrn.com/abstract=2679594, October 2015
Diamond, Jared	A country’s affluence depends partly on its institutions, on geographic and other historical factors	Institutions don’t arise at random around the world but are outcomes of a long history shaped by geography, and they are linked inextricably with the origins of states. Countries with a long history of state societies have tended to enjoy high growth once they added advanced technology to their institutional advantages	“Economics: The wealth of nations”, Nature 429: 616–617, June 2004
Chanda, Areendam and Louis, Putterman	Early starts, reversals and catch-up in the process of economic development	More rapid growth by early starters (China, India, Greece) than latercomers to agriculture and statehood has been the norm in economic history, and the “reversal of fortune” associated with the European overseas expansion that began around 1500 was both exceptional and temporary	LSU Working Paper series, 2005–2006
Feng, YI	Democracy, political stability and economic growth	Democracy has a positive indirect effect upon growth through its impacts on the probabilities of both regime change and constitutional government. Long-run economic growth tends to exert a positive effect upon democracy	British Journal of Political Sciences 27(3): 391–418, July 1997
Gorodnichenko, Yuriy, and Roland, Gerard	Culture, institutions, and the wealth of nations	Economic impacts of culture based on the frequency of specific genetic variables: Individualism or collectivism impact on innovation and growth. More individualist culture that emphasizes personal freedom and achievement leads to more innovation and to higher long-run growth	Review of Economics and Statistics 99: 402–416, July 2017
Gerring, John Bond, Philip Barndt, William And Moreno, Carola	Democracy and economic growth: A historical perspective	If Democracy matters for growth today, due to a country’s regime history as well as its current status. The distant past may have contemporary effects. Democracy is thus best considered as a stock, rather than level, variable. Secular-historical experience of democracy and authoritarianism matters: long-term democracy leads to stronger economic performance	World Politics 57(3): 323–364, April 2005
Glaeser, Edward L., La Porta, Rafael, Lopez de Silanes, Florencio, and Andrei, Shleifer	Do institutions cause growth?	Existing research does not show that political institutions rather than human capital have a causal effect on economic growth. Much evidence points to the primacy of human capital for both growth and democratization. Poor countries get out of poverty through good policy choices, often pursued by dictators, to subsequently improve their political institutions	NBER Working Paper series no. 10568, June 2004. Journal of Economic Growth 9(3): 271–303, September 2004
La Porta, Rafael Lopez de Silanes, Florencio, and Andrei, Shleifer	The economic consequences of legal origins	Legal origins, i.e., highly persistent systems of social control of economic life, have significant consequences for the legal and regulatory framework of the society, as well as for economic outcomes. The policy-implementing focus of civil law versus the market-supporting focus of common law impacts on economic and social outcomes	Journal of Economic Literature 46(2): 285–332, June 2008
La Porta, Rafael Lopez de Silanes, Florencio Shleifer, Andrei and Robert, Vishny	The quality of government	Countries that are poor, close to the equator, ethnolinguistically heterogeneous, use French or socialist laws, have high proportions of Catholic or Muslims, exhibit inferior government performance. In Catholic countries, governments tend to be less efficient and more corrupt compared to Protestant and common law countries	Journal of Law, Economics and Organization 15(1): 222–279, March 1999
Kynge, James, McKinsey Global Institute	Data-centric approach to governance and economic growth	China’s hybrid strain combines rigid political control, central planning and free-market flexibility. Data revolution and party-state lead to “techno-tatorship” to create new economic dynamics with sociopolitical stability. Digital technologies help resolve systemic inadequacies that stem from the corruption-driven centralized authority	Financial Times, October 28–29, 2017
Przeworski, Adam	Country-specific conditions shape institutions	Political regimes may have two effects on the rate of growth: a direct one on factor productivity, and an indirect one, via the growth of the labor force. Projects of institutional reform must take as their point of departure the actual conditions, not blueprints based on institutions that have been successful elsewhere	Government and Opposition, British Political Science Association, Blackwell Publishing, April 2004
Przeworski, Adam, et al.	Democracy and development, political institutions and well-being in the world,1950–1990	Economic development does not tend to generate democracies, but democracies are more likely to survive in wealthy societies. The type of political regime has no impact on the growth of national income, and political instability affects growth only in dictatorships. Per capita incomes rise more rapidly in democracies due to lower population increase. Political regimes have greater effects on demography than on economics	Cambridge University Press, 2000
Putterman Louis	Ripple effects of the Neolithic Revolution on modern development process	Differences among human societies with respect to the timing of the transition to agriculture led to differences in levels of technological development and social organization that persisted into the era of European expansion and colonization. Early reliance on agriculture at the time of the Neolithic Revolution is still impacting on today’s income differences and levels of economic development across countries	Economica New Series 75(300): 729–748, November 2008
Muller, Edward and Mitchell A. Seligson	Inequality and insurgency	When income inequality is high, the probability of domestic political violence increases substantially, and can lead to uprisings and civil war, hence slowing economic growth	American Political Science Review 81(2): 425–450, 1987
Rodrik, Dani, Arvind Subramanian, and Francesco Trebbi	Institutions rule: The primacy of institutions over geography and integration in economic development	There are substantial, economic gains in improving institutions. Geography and History are not key determinants of development. If colonial experiences were the key determinant of income levels, how would one account for the income variations among countries that had never been colonized?	Journal of Economic Growth 131–165, November 2004
Robinson, James	Economic development and democracy	There is no evidence that economic development has a causal effect on democracy. Neither does it support the idea that economic development influences the probability of coups but not democratization. Economic development comes along with changes in the structure of the economy that are related to capital intensity. Countries with higher income per capita would be more capital intensive, hence generating an empirical relationship between income per capita and democracy but income has no causal effect on democracy	Annual Review of Political Science 9: 503–527, 2006
Sharma, Ruchir	Why economic forecasts fail	Straight-line extrapolations are almost always wrong. Institutions and demographics change too slowly to offer any clear indication of where an economy is headed. Though certain national cultures are good or bad for growth, the point is that culture can change quickly. Political cycles are as important to a nation’s prospects as economic ones. To sustain rapid growth, leaders must balance a wide range of factors, and the list changes as a country grows richer	Foreign Affairs 52–56, January–February 2014
Sollogoub, Tania	Where the anger is coming from?	The resurgence of populist movements has always heralded a weakening of democracies. Such movements emerge when traditional political parties lose legitimacy. They fill a political vacuum and are a symptom of the crisis before becoming its cause. Wealth gaps and social imbalances born of globalization and technological progress feed frustration and social unrest	Credit Agricole Group, Economic Research, December 2016