Towards a Governance Barometer for stormy times in emerging markets

Abstract

Financial institutions are concerned about the quality of local institutions where they will invest capital as well as human resources and technology. In developing countries, political stability, the curb of corruption and ease of doing business are considered by most investors as the key variables to boost attractiveness. Higher degrees of political instability are associated with lower growth rates of gross domestic product (GDP) per capita. Regarding the channels of transmission, political turmoil adversely affects growth by lowering the rates of productivity and physical and human capital accumulation. Income per capita, institutional stability and democracy are correlated because economic and socio-political institutions transform growth into comprehensive and inclusive development. Today, with mounting global economic and geopolitical turbulences, measuring and anticipating the evolution of governance and institutional stability has never been more challenging. The authors’ recent research shows that governance can provide risk managers with a reliable warning signal of socio-economic and political turmoil. To measure the level of governance, a new composite indicator has been built for 130 developing countries. Its added value stems from a wide range of sub-indices including business conditions, institutional stability, corruption and human freedom, as well as an ‘expert assessment’ that is based on seasoned country risk analysts. This new indicator has been evaluated in several ways. A relationship is observed between the Governance Barometer and low income per capita, institutional fragility and corruption. This global indicator of governance aims to be a useful risk warning tool for financial and cross-border investment strategies. It remains that the structure of the new measure’s mean scores will evolve slowly and cannot be expected to flag an immediately impending crisis. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business/.