Lecture V Country Risk Assessment Methodologies: the Qualitative, Structural Approach to Country Risk
–The Welfare and Social Dimension and the Macroeconomic Fundamentals -
Lecture V Country Risk Assessment Methodologies: the Qualitative, Structural Approach to Country Risk
–The Welfare and Social Dimension and the Macroeconomic Fundamentals -
“Risk management is not a program but an ongoing process that must be developed over time. Our models are constantly reviewed and improved. On the whole, they have proven their worth. But good risk management isn't just about mathematical models and systems – it also requires an understanding of the market, intuition and the ability to weigh up what proportions of risk are healthy. In that respect, the abbreviation CS in my opinion doesn't just stand for Credit Suisse, but also for common sense, which plays a key role in risk management.”
Hans-Ulrich Doerig
Chairman of the
Board of Directors
of Credit Suisse
The Qualitative Approach
A robust qualitative approach leads to comprehensive country risk report that tackle the following six elements:
Social and welfare dimension of the development strategy;
Macroeconomic fundamentals;
External indebtedness evolution, structure and burden;
Domestic financial system situation;
Assessments of the governance and transparency issues;
Evaluation of the political stability.
Inequality
Inequality
The richest 10% of the population in a European nation may receive 20.1% of national income, as they do in Sweden, or 27.3%, as they do in the UK and Ireland.
USA (2005):The top 10 percent of the population carried away some 48.5 percent of all reported income in the US in 2005—also the highest percentage since 1928, on the eve of the Depression—an increase of 2 percent from 2004, and up from 33 percent of the reported total in the late 1970s.
Poverty VS Inequality
Multi-dimensional concepts:
income, wealth, assets, opportunities;
Poverty people below the poverty line;
Inequality whole population.
We will focus on INCOME as an indicator for inequality.
Inequality: definition
DEF: “Distribution of income and wealth among different groups in the society and it concern variation in living standards and in wealth itself across a whole population.”
Why inequality matters?
Philosophical and ethical reasons;
Functional level
Three Concepts of Inequality
Concept 1: Unweighted inter-national inequality
Unit of observation: country;
Measure: income per capita;
within country distribution is equal;
country size doesn’t matter;
converging issues.
Concept 2: Weighted inter-national inequality
The same features as the previous one but COUNTRY SIZE matters;
Concept 3: True world inequality
Unit of observation: individual (no matter the country of origin);
Our benchmark!
Measurement Issues
Which currency unit?
Convert local currency into dollar;
International purchasing power
Purchasing Power Parity exchange rate
This purchasing power rate equalizes the purchasing power of different currencies in their home countries for a given basket of goods.
Measurement Issues
Survey based mean income from survey or GDP per capita?
Mean income from survey ≠ GDP per capita:
Key factors: taxes and consumption;
Gap is bigger in developed countries.
Concept 1 and 2 GDP per capita
Concept 3 distribution of income across individuals
Measurement Issues
Income or Expenditure?
Expenditure actual living standards;
Income potential living standards
Per Capita or Equivalent Adult?
World income distribution per-capita basis
Equivalent adult: more complex, more precise but difficult comparison across countries.
Measurement Indicator (1)
Variation of income distribution
(among nations or among individuals):
Concept 1 & 2:
refers to the average world income (weighted or non weighted);
N refers to the number of countries.
Concept 3:
refers to the average income from the survey;
N refers to the number of people in the world.
Within a country:
refers to the average income from the survey, based in the population of ONE country;
Measurement Indicator (2)
Problem with V:
If I double everyone’s income V would quadruple
If country i is richer than country j inequality is higher in j
Solution standardize V:
Measurement Indicator (3)
Lorenz Curve:
The greater the inequality, the further the Lorenz curve will be from the 45° line.
Gini Coefficient:
It’s the area between the Lorenz curve and the 45°line;
Range [0,1];
the greater the inequality, the bigger the area, the greater the Gini coefficient.
Wealthiest 10% share of national income (%).
Trend in Inequality: Concept 1 VS Concept 2
Trend in Inequality: Concept 1
Why 1952? First Year China’s data are available;
Sharp increase in C1 after 1980s (i.e. divergence):
Lost decade in Latin America;
Decline in income in Eastern Europe and former Soviet Union;
Disastrous economic performance of many African Countries;
Good economic performance of rich countries.
Since 2001: ↓ divergence!
High economic growth rate!
African Countries > 4%;
Post-Communist countries > 6%;
Latin America ≈ 3%
BUT level of Inequality is much higher today than in 1960s!
Trend in Inequality: Concept 2
Higher level of Inequality if we account for country’s size!
Decreasing trend mainly driven by China’s economic growth (late 1980s);
BUT after 2000 the decline take place even without China! Mainly due to India great performance!
Trend in Inequality: Concept 3
Trend in Inequality: Concept 3
Trend in Inequality: Concept 3
Inequality has increased between 1988 and 2002;
Why?
Increasing GAP between rich countries and large rural countries in Asia (Bangladesh, rural India, rural China)
Rural china VS Urban china
Decline in income in Eastern Europe
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