Country risk & Governance: Strange Bedfellows

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by Bouchet & Groslambert, in Governance and Risk in Emerging and Global Markets, edited by Sima Motamen, Palgrave-MacMillan, 2005

This working paper investigates whether governance and corruption issues are incorporated in country risk assessment by private and official creditors. Today there is a wide ranging consensus to consider that economic growth is a necessary but not sufficient condition to pave the way for sustainable development and favourable business environment. Investors and creditors are looking for an optimal combination of robust fundamentals, socio-political stability and government efficiency. Governance quality captures the essence of this search for squaring the circle. However, when looking at actual risk exposure by private capital markets and official institutions, one cannot find much evidence of a relationship between corruption and lending flows. At best, corruption is not a driving element of lending decisions, at worst one can identify categories of creditors who seem to back corrupt governments up. Much remains to be done thus to reconcile governance, country risk assessment and lending strategy decision.

 

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