The Empire Effect: The Determinants of Country Risk in the First Age of Globalization, 1880-1913

Abstract

This paper reassesses the importance of colonial status to investors before 1914 by means of multivariable regression analysis of the data available to contemporaries. We show that British colonies were able to borrow in London at significantly lower rates of interest than non-colonies precisely because of their colonial status, which mattered more than either gold convertibility or a balanced budget. Allowing for differences not only in monetary and fiscal policy but also in economic development and location, the “Empire effect” was a discount of around 100 basis points. We conclude that investors saw colonial status as a no-default guarantee.