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2 months ago
Discuss the sources and types of risks in emerging market countries.
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Business and Its Environment
Edition: 7th
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2 months ago
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The immediate source of many risks is the weak rule of law in a country. This means that agreements and contracts may not be enforced, even if their terms are unambiguous. It can also mean that the law is not enforced impartially and that regulations can be applied in a discriminatory manner. Moreover, politics and political ties can override the rule of law.
Following are the set of risks in emerging markets that differ from those in most developed countries.
-Coups: Sudden changes can occur because of military coups that can result in a complete shift in economic as well as political policies.
-Democratic revolution: A change in government brings a change in policies that may not be friendly to foreign investment.
-Festering Anger and Revolution: The sources of the revolutions were varied and differed across the countries. Some protesters sought to rid the country of an autocratic ruler. Some sought democracy. Some sought an Islamic state. Some women sought liberation and greater freedom or to protect the liberties they had. Some sought greater freedoms. Many of the young sought change. Most sought a better life. The Arab Spring was an unexpected event at least with respect to its timing, and the underlying anger and forces were varied, making predictions of the outcomes uncertain. In Egypt, Libya, and Tunisia elections and new constitutions were the initial steps of the revolution, but where that would lead was uncertain.
-Policy Risk: This arises from the ambiguous and unsettled political situations in emerging market countries.
-Regulatory Risk
-Price controls
-Financial restrictions: Emerging markets countries have imposed a variety of restrictions on foreign direct investment, foreign exchange transactions, and the repatriation of earnings. Some of these restrictions are temporary, but many are long lasting.
-Nationalization and seizures: This discourages investments and may lead to mismanagement of the expropriated companies.
-Political megalomania
-Political corruption
-Ethnic and religious conflict
-Media restrictions
-Environmental risks: Environmental risks center on both harm to the environment in an emerging markets country and the harm from cross border externalities such as global climate change.
-Market Risk Hedging: Most emerging markets countries are not well integrated into global markets, and this can increase the cost of capital yet provide a measure of insulation from risks in global markets.
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