A Non-compensative Index for Country Risk in OECD Countries

Abstract

In the last few years a fast growth of international lending and foreign investment has been happening. As a consequence of the large flow of capital going towards new developing countries, the risk exposure of the lenders and investors is rising, and country risk analysis becomes more and more important for the international financial operators. In the present paper we propose a non-compensatory index to reckon the country risk (since now, Country Risk) in OECD countries: the Mazziotta Pareto Index (MPI). It assumes the “non-substitutability” of the dimensions, all of them being considered of the same importance, without any compensation possible among them. The indicator classifies the Ocse with OECD into six main groups, according to their high or low country risk. Although based on a small number of variables, the MPI can to assess quite correctly the pre-figurative “latent dimensions” of the Country Risk in the short run. The proposed index sheds light particularly on the risk linked to political-economical events and decisions, and on the public finance. The Country Risk Index proposed allows to asses international country risk ratings comparatively, and to single out the relevance of economic, financial and political risk as components of a general risk rating.