One of the main trends that have been apparent in the world of global governance and economy since the 1990s is the ranking and rating indices that gauge the performance of states in diverse topics. These are such ascorruption, democracy, gender equality, business friendliness, market liberalism, freedom of the press, conflict, the sustainability of the environment, creditworthiness, and the rule of law, human rights and many more. The development of these indices reflects the strengthening of global governance networksand the utilization of performance evaluation techniques for public management. From a business perspective, investors place a huge significant in determining the riskiness of the investment climate ina country. These risks involve certain aspects such as economic, political and business risk that are particularly unique to a specific country. This report evaluates the credibility of grading states as either weak or strong using various indices.
Categorisation of States
Of the 193 members of the United Nations, about seventy of the states are considered strong. The ranking is based on democracy ranking, human rights report, the anti-corruption perception indices, and the competitiveness indices in the world economic forum, and the ease of doing business in the country using surveys from the World Bank. The rest about ninety states are ranked as weak, some are stronger, and others are tending towards failure almost being categorised as failed states. These states are considered weak because they supply less than adequate quantities of political goods or they offer poor quality political goods. There are about twelve states that are categorised as failed and one collapsed state (Rotberg, 2015).
Acemoglu(2005)argues that weak states often lack the power to tax and regulate its economy such that they can stand the changes in the political and social challenges that affect thecountry. On the contrary, strong economies create distortions such that when the state is exceedingly strong, the taxes imposed by the rulers are high which stifles economic activities. Weak states are perceived to be costly because rulers are unable to impose high taxes that give them sufficient incentives to invest in public goods (Larsson, 2005). Violent conflict is often associated with weak states and can be a reason for the collapse of a nation, thus posing a threat to the business environment of a country. This report outlines the reasons why it is fair to rate states as strong or weak.
Helps Investors Understand the Risks Involved
Rating a state strong or weak helps investors understand the risks involved in their investments in terms of economic and political risks. Strong countries demonstrate robust legal systems that guarantee investors of what is going to happen with their investments in different scenarios; thus it is a critical condition to bring foreign investments in a country. States that are categorised as strong have improved governance that boosts cooperation between government and citizens. Such a system is legitimate, effective, and its citizens widely support it. The civil society is strong, open and it can participate positively in politics and government.The economic risks refer to a country’s capability to pay debts since it has stable finances and a robust economy. Whereas that of a weak economy have weaker finances or the economy is unsound.
Politically, labeling a state as strong gives investors the perception that the country makes sober political decisionsand thus there are no anticipated losses to investors. Such a state maintains a hospitable climate for outside investment. Grading a state enables investors to understand the risk of foreign exchangeregulations in terms of how it upholds the value of its foreign exchange contracts. For instance, when investing in equity with a particular company in a foreign state, an understanding of the country’s sovereignty can help in creating a macroeconomic picture of the environment that the firm will be operating in. Therefore, grading a state can be in a good way beneficial in evaluating the economic condition and the strength of a country in terms of potential investments (Perry, 2018).
Participation and Institutions
Grading states enable one to understand the level of involvement and the strength of the institutions in the country. Therefore, it builds an understanding of the best and most reliable systems that people can depend on. In terms of participation, grading helps in assessment of representation, civil society,social support and compliance withthe policy. Therefore, firms intending to do business ina foreign country can comprehend how these issues can impact on their ventures. Strong states portray specific characteristics such as accountability in terms of public opinion and evaluations of the government activities and transparency in how they conduct their operations.
Additionally, there is a concise understanding of the institutions that govern the country. It helps businesses and people understandhow the state upholds the rule of law by enforcing clear institutional standards and enforcement. It portrays the level of responsibility among its citizens (Johnston, n.d.). The level of participation and the kind of institution a country supports helps a firm to understand how productive society is. This is the average value that every individual creates in a certain period of time. For instance, there is no efficiency if everyone enjoys job security and on the other hand, if job security can be lost to poor performance all the employees will work hard to maintain their job and be more effective. Therefore rating a state helps investors understand the efficiency of the citizens and how they can participate in building a brand.
Economic Growth Prospect
Kramer (2019)argues that the gross domestic product (GDP) is one of the primary indicators of the health of a country’s economy. This reflects the size of an economy and expressed as a comparison to the previous quarter of the year. This helps investors understand the growth opportunity of a foreign company in a particular company. When the economy is healthy, there is typically a low employment rate, and wages accelerate as businesses demand labour to catch up with the growing economy. Bad economic ratings give investors the perception of the possibility of lower earnings for companies. Additionally, states that have a high growth rate reflect the probability of a company growing at an equivalent rate thus giving the impression of positive outcomes.
Developed countries consist of large and most industrialised economies, the systems are well developed, they are politically stable, and the rule of law is well entrenched. Therefore, they offer the safest investment destinations for investors. Emerging markets experience rapid industrialisation and very high levels of economic growth and can often have a higher return on investments than those in the developed market. Frontier markets offer risky investment to investors, often suffer from low liquidity. These markets requireinvestors to pay careful attention to the political environment. Some of them have restrictions on the ability of foreigners to invest. Therefore, these ratings offer an understanding of the prospect of doing business in a specific environment. Investors who prefer low risk and low return on investment can choose to invest in developed countries while those who intend to take a higher risk but higher return on investment can select the less certain markets.
Helps in Understanding of Gender Gaps and Literacy Rates in a State
Poor literacy limits a person’s ability to engage in activities that need one to think critically. Most states that are categorised as weak often tend to have low literacy levels. This contributes to a lowered employment status, poor health, high levels of crime and gender inequalities (Davidson, 2017). These conditions are not suitable for businesses especially those that are highly dependent on skilled labour. Hippe and Perrin (2017)argue that gender inequality in human capital is a significant indicator of economic development of a country. Gender equality has played a crucial role in transitioning to modern growth thus revealing its significance in the businesses environment.
Gender equality is a fundamental structure of economies and societies, integrating women in economic forum gives more insights to businesses such as diversity of skills. Ideas and perspectives that help the economy thrive. Fender equality is often one of the indices used to grade states where strong states are often portrayed to have better structures in terms of gender diversity s compared to weaker nations. A report reveals that men are distinctivelyunderrepresented in occupations such as education and health, whereas women are underrepresented in engineering, manufacturing, and construction (World Economic Forum, 2017). By closing the gender gaps fields such as emerging technologies could have access to more individuals that have diverse skills, abilities, and expertise.Therefore, societies that reflect a considerable effort to include women who are often underrepresentedin their workforce, build a balanced system that can thrive in the contemporary business environment. Research reveals that society is moving from the era of capitalism to talentism and thus the success of a state is dependent on its ability to integrate women as a crucial force in their talent pool.
The literacy rate of a country is also a huge determinant of how strong or weak a state is. Early literacy is considered vital while digital literacy is the current trend in the contemporary business climate. As the world becomes increasingly technology-driven daily, the significance of such becomes apparent as more and more businesses opt to incorporate technology in their daily functioning (Stevenson, 2017). Therefore, if a state portrays high literacy levels in both early literacy and digitalliteracy, it fosters a good business environment and economic development.
Weak states are viewed as economies that lacksufficient revenues or the capability to regulate its economy; thus the results of much disappointing economic performance for many less-developed nations. Weak states are often perceived as a threat to global and regional security, and more often than not they have gross violations of human rights. While the cost of strong states are familiar in political economy literature where its citizens’ investments and efforts are discouraged due to the absence of checks on the redistribution of power and the political elites owns most of the control of the government. In the face of globalisation, there have been significant changes especially in regards to global interactions. Governments even in strong states find themselves without the degree of control that they used to have especially concerning economic issues. Countries that are weak or ruled by weak government often find themselves ina hostile external environment that is driven by a passionate belief in the free market. Therefore, as more and more companies go global and people start interacting with each other often, the significance of grading states become apparent.
Grading states help individuals especially businesses understand the environment that they intend to be part of and understand the risks involved in their ventures. It allows investors to analyse the risks involved and the return of investment expected. The higher degree of international relation over the past decade has altered the power of states to control some crucialaspects of the economies and partly political structure. Therefore, either grading a country as weak or strong helps firms that intend to go global in understanding the business environment that they plan to take part in and the risks involved using the indices that are used in the grading system. It is essential to understand that a state can be graded as strong with highly efficient systems but have a meager growth rate while a weak state can have high returns. The grading system helps to understand the crucial aspect of a country’s governance especially concerning the business environment.
Acemoglu, D., 2005. Politics and economics in weak and strong states. Journal of Monetary Economics, 52(https://economics.mit.edu/files/4470), pp.1199-226.
Davidson , C., 2017. Information is for everyone: Why literacy is a gender equality issue. [Online] Available at: https://www.ifex.org/international/2017/08/04/literacy-gender-equality/ [Accessed 5 March 2019].
Hippe, R. & Perrin, F., 2017. Gender equality in human capital and fertility in the European regions in the past. Investigaciones de Historia Económica, 13(3 http://sci-hub.tw/https://www.sciencedirect.com/science/article/pii/S1698698917300061), pp.166-79.
Johnston, M., n.d. Good Governance: Rule of Law, Transparency, and Accountability. (http://unpan1.un.org/intradoc/groups/public/documents/un/unpan010193.pdf), pp.1-31.
KRAMER, L., 2019. What is GDP and Why Is It So Important to Economists and Investors? [Online] Available at: https://www.investopedia.com/ask/answers/what-is-gdp-why-its-important-to-economists-investors/ [Accessed 5 March 2019].
Larsson, S., 2005. Weak states?: A pursuit for a weak state definition and feasible reconstruction theories. STV 004, (https://lup.lub.lu.se/student-papers/search/publication/1332751), pp.1-28.
PERRY, 2018. Evaluating Country Risk For International Investing. [Online] Available at: https://www.investopedia.com/articles/stocks/08/country-risk-for-international-investing.asp [Accessed 5 March 2019].
Rotberg, R., 2015. Failed and Weak States in Theory and Practice. Political Science, (http://www.oxfordbibliographies.com/view/document/obo-9780199756223/obo-9780199756223-0119.xml;jsessionid=E20642730C59CF2BF719948EC399133E).
Stevenson, 2017. The Importance of Literacy in the 21st Century. [Online] Available at: https://www.stevenson.edu/online/blog-news-events/importance-of-literacy [Accessed 5 March 2019].
World Economic Forum, 2017. The Global Gender Gap Report 2017. Insight Report, http://www3.weforum.org/docs/WEF_GGGR_2017.pdf, pp.1-361.
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