Measuring the Impact of Risk on Globalization:

Evidence from Africa, Asia, and Latin America


Globalization through international trade and investment does not lead automatically to higher rates of economic growth. Models that focus solely on traditional economic variables often miss important institutional considerations that are essential to an effective transition to higher rates of economic growth. In turn, models that focus exclusively on institutional variables often exclude how institutional behavior affects the level of risk. In this paper, we examine traditional and institutional models of economic growth with and without explicit consideration of risk using a sample of 63 countries from Africa, Asia, and Central and Latin America for the 1980-2002 period. Using panel regression analysis, we find that risk is an important determinant of economic growth and that policy measures that take risk into account are an essential step to successful economic globalization.

 Assessing the Role of Risk in Growth and Development: Evidence from Latin American, African, and Asian Countries

 Risk in Globalization:

Measurement Issues and Analytical Framework

There are several ways to measure risk. One is to derive the standard deviation around a mean as an absolute measure, while the coefficient of variation serves as a measure of relative risk. While these measures serve to determine the level of risk in individual decisions, at the macroeconomic level, a complementary approach is to use an index of risk that incorporates the various components. Such country composite risk indices provide an important explanatory role in determining differential rates of growth of per capita GDP across regions and time, as the results shown here illustrate.

Country composite risk indices consist in an aggregation of various sources of risk across sectors in an economy. While there is no perfect composite risk index, one can derive an aggregate by compiling sectoral measures, as illustrated below in Figure 1

Figure 1

If an aggregate index of country composite risk captures key elements of the macroeconomic policy framework, it can then be used to explain differences in rates of growth in per capita income. This can be done directly or indirectly through the effects of risk on key growth determinants such as a country's national rate of saving and its degree of trade dependence. In turn, one can explain the level of country composite risk in terms of such variables as the degree of economic freedom, democracy, and international aid. In our present analysis, we structure estimates using the following schematic framework shown in Figure 2.

Figure 2

 A Stylized Profile of Risk in Globalization

We illustrate some of the relationships suggested in Figure 2 in the following graphs below, namely, the relationship between country composite risk and per capita GDP, country composite risk and the national rate of saving, and country composite risk and the degree of trade dependence. Econometric estimates on these and related tests are reported in the next section.

Figure 3

Figure 4

Figure 5

Empirical Estimates 

 Dependent Variable

 Title - Table Link

 Table 1

 Real Per Capita GDP

Basic Economic Globalization Model

Table 2 

Real Per Capita GDP

Freedom, Democracy, and Globalization Model

Table 3 

Real Per Capita GDP

Freedom, Democracy, Aid and Growth 

Table 4 a

Gross Nat. Saving Rate

Aid-National Savings 

 Table 4b

Trade Dependency Ratio

Aid-Trade Dependency 

 Table 5a

Economic Freedom

Aid-Economic Freedom 

 Table 5b



 Table 6

Real Per Capita GDP

Risk-Based Economic Globalization Model 

 Table 7a

Gross Nat. Saving Rate

Risk-National Savings 

 Table 7b

Trade Dependency Ratio

Risk-Trade Dependency 

 Table 8

Country Composite Risk

Aid-Risk Model 

 Table 9a

Country Composite Risk

Economic Freedom 

 Table 9b

Country Composite Risk


 Data Appendix
 Table A1 - Variables, Index Scales, and Sources
 Table A.2 - Descriptive Statistics
 Table A.3 - Country Listings by Panel



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