‘India would be classified as a stable democracy’

‘India would be classified as a stable democracy’
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First Published: Wed, Jul 04 2007. 02 10 PM IST
Updated: Wed, Jul 04 2007. 02 10 PM IST
Investing has become a global activity with investors in one country eyeing opportunities in several others, some developed economies and others, emerging ones. The economy of a country is dependent on the policies of its government. Citi Private Bank has teamed up with the Eurasia Group, a research and consulting firm, to offer its clients exclusive access to the Global Political Risk Index (GPRI).
The GPRI rates 24 developing countries and assesses political risk by analysing political, social, security and economic developments.
In an email interview with Mint, the Eurasia Group’s London-based India analyst Seema Desai discussed the index and its utility for investors. Edited excerpts:
How exactly do you collate information and mark scores on government, society, security and economy?
For each of these four categories, there are five indicators. Analysts score 20 variables in all. Indicators in the economy segment are generated purely through objective, quantitative data which is updated every month. In the other three segments of the index, scoring takes place through a combination of quantitative and qualitative data. So, for instance, the human security variable (which is in the society segment) is a function of the United Nations’ human development index and the Gini coefficient (which measures income inequalities), but also employs a subjective analyst’s input based on a list of appropriate factors. On the other hand, rule of law (in the government category) is a qualitative assessment of the individual country analyst.
Analysts are always given a detailed set of criteria to guide their thinking on each variable.
Are these scores susceptible to change on a monthly basis?
That depends on the country in question, but changes in political stability are more often generated over longer time periods.
Is the index biased towards predictability more than political stability?
The GPRI is an index of political stability. Indeed, stability implies a high degree of predictability.
Democracies often tend to be more prone to change in government than dictatorships, even if the latter might be more susceptible to violent change. Does that mean a lower score for democracies?
The score does not substantially measure changes in government unless those changes are expected to significantly change economic policy. Instead, it assesses the structural institutionalization of the regime and its opposition. The GPRI assumes no direct link between the type of regime and political stability: while variants of democracy are more stable than most variants of dictatorships, established authoritarian regimes are often more stable than transitional democracies.
In that case, how would the GPRI classify India: as a transitional democracy or a stable one?
India would be classified as a stable democracy.
Algeria scores the highest on economy, as per your latest ratings. Why is that so?
Algeria scores very high on its external sector and debt position, as well as on its fiscal and monetary environment. These scores reflect a high level of predictability, which is a result of Algeria’s very low integration into the global economy.
Does that imply that the lower the global integration of an economy, the higher the predictability?
Not necessarily. Domestic policy stance and credibility are also important.
Most investors in the US as well as the European Union talk about India and China in the same breath, as the leading Bric economies. Yet, the GPRI gives the highest score to Brazil. Would an investor, then, be able to profit from a decision based on this index?
The GPRI gives an indication of a country’s proneness to crises. By taking the GPRI scores into account, investors can profit by making investment decisions that weigh returns against potential risk. Individual components of the score, for instance the strength and cohesiveness of government, have been found to be a statistically significant predictor of change in the market assessment of sovereign risk as measured in emerging market bond spreads over the US treasury rates.
ashish.s@livemint.com
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First Published: Wed, Jul 04 2007. 02 10 PM IST