Foreign political risk assessment: government instability and nontariff barriers to trade

Abstract

While many political risk assessments depict government instability as a key variable in estimating foreign business risk, evidence linking government instability and change in policies affecting international businesses is limited and mixed. Is the focus on government instability misplaced? Using a pooled cross-sectional time series design, this study examines the relationship between two measures of government instability (turnover in the head of government and turnover among relevant cabinet ministers) and the use of hard-core non-tariff barriers to imports on a quarterly basis for the countries of South America from 1981 to 1985. Though cabinet turnover appears to bear no relationship with policy change, the findings indicate that turnover in the head of government has a strong positive association with both protectionism and liberalization. This suggests that this kind of government instability is an important element in assessing foreign political risk.