Country Risk Analysis and Managing Crises Tower Associates Case Solution

Country C is a resource-rich country hampered by its weak infrastructure. The government is also in transition, and the country is moving towards a more liberal economy. However, growth is still stunted as prices interest rates and exchange rates are regulated. The prospects brought about by the gradual move to a market economy are bright.

Country D is quite similar to country C in terms of its political and economic structure. However, income inequality levels are of concern and consumption contributes to very little of GDP. Prices, interest rates and exchange rates are regulated to ensure economic growth.

2. Is the country currently following appropriate economic policies from a domestic as well as an international perspective?

Country A seems to have in place an expansionary fiscal policy, which has led to a budget deficit. Pursuing such a policy can put the country at risk of a foreign debt crisis if foreign loans that are obtained to fill the deficit gap are not serviced. Moreover, if domestic investment is low, the policy is probably only good in the short term. The floating exchange rates can also be prone to speculative attacks causing acute depreciation and thus, a currency crisis.

Country B, however, should complete its transition to a wholly market economy. The rise in private investment is a good sign. Such a policy is bound to raise investor confidence internationally too.

Country C’s government should expand its fiscal activities, galvanizing the economy to enhance its infrastructure. Prices, interest rates and exchange rates should ideally be left to the market forces as intervention can result in market failure. Only through this can efficiency be gained.

Meanwhile, Country D should also follow a similar strategy as Country C while putting in place progressive taxes for the purpose of income redistribution to tackle the widening income gap.

3. After your risk analysis, which country is more likely to have what kind of crisis and why?

Country A is prone to a foreign debt crisis and a currency crisis, due to its budget deficit and floating exchange rates. Meanwhile, country B, C and D are at risk from financial crises during their transitions to more free economies.