Political risk and political loss for foreign investment

In 1986, The Economist produced a risk analysis for 50 countries under the title “Countries in Trouble.” The analysis resulted in a risk rating based on scores from ten weighted political and social variables. This article examines the theoretical structure underlying the analysis and assesses the accuracy of The Economist's projections. Discussion includes considerations of variable choice, variable weights, and data derivation as well as the impact on the outcomes of implicit theory. Conclusions focus on the possibility that underlying theory has predetermined some results, altering the direction of foreign investment. The discussion stresses the connection between abstract theory and profit/loss consequences for businesses in the field of political risk analysis and, particularly, the need for assessing and measuring politically determined losses in order to statistically evaluate the accuracy and utility of risk assessments.