Country Risk Analysis And Managing Crises Tower Associates Case Solution

1. Are there any hidden assumptions or price rigidities in the country or countries that might inhibit market force indicators from revealing the true economic health of the country, thereby either preventing government policy actions from correcting the problems or otherwise making them ineffective and counterproductive?

The Keynesian school of thought is a strong advocate of the presence of price rigidities in any economy. Although markets are now being liberalized - allowing them to respond to changes in demand and supply, price rigidity often delays the market mechanism to settle on its equilibrium. Hence, government regulation is highly favored by the Keynesians. In analyzing the countries for Tower Associates, vast differences were observed in the nominal and real GDPs. For example, the nominal GDP of Country A has increased from $1346028 in 2002 to $1269810 in 2007. However, its real GDP has only increased from $745000 to $860000 in the same time period. This essentially indicates that the rise in nominal GDP was majorly because of a hike in prices, rather than an increase in actual output. This was just one example where the inflated GDP figure could distort the true condition of the economy and mislead the government to design an ineffective policy framework.

2. What is the current domestic and international economic situation of each country relative to the benchmark performance measures for that country?

Tower Associates has determined criteria to assist them in selecting the most appropriate country. This includes Political and Economic stability, effective legal and accounting systems, favoring entrepreneurial environment and a supportive attitude towards foreign investment.

Based on the benchmark set for deciding which country to locate in, the analysis reveals that Country A lacks incentives for investment, Country B has a volatile history and C is vulnerable in terms of the influences on prices, exchange rates and interest rates. Country D is the safest option to locate in not only because its economy is growing, but also because it has an environment that is conducive to entrepreneurship and has a high propensity to save.

3. Is the country currently following appropriate economic policies from a domestic as well as an international perspective? Provide supporting justification for your answer. 

Country D has outperformed all other countries on most of the indicators that were used in the previous analysis. A high and increasing real GDP of 18698000 (LC Millions) is reflective of the potential growth prospects this country entails. The low consumption rate of 35.88% suggests that a higher proportion of income is being saved. Higher savings would ultimately translate into investments which can also be observed by the trend of investments in Country D, currently resting at 42.15%. Therefore, domestic consumption and investment trends provide confidence to Tower associates to locate in this country. Other domestic indictors, such as consumer prices reflect a stable increase in the rate of inflation primarily because the state carefully manages it. Country D has also executed stringent economic policies when it comes to international competence, standing at a trade balance of 9.3% of GDP and a current account surplus of 1.08% of GDP. Moreover, the exchange rate has remained fairly stable, yet the country has been successful in increasing exports over a span of 6 years.