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Gambling on Conflict: Profiling Investments in Conflict Countries
Unformatted Document Text:  Andreea Mihalache Updated: March 20, 2008 the poorest recoveries record (0%) among claim recoveries by OPIC 16 . Recoveries for political risk claims are an outcome of negotiations between OPIC (an arm of the US government) and host country governments. The failure to reach agreements when political violence damages are involved is a sign of the difficulty of bargaining, holding anyone responsible, and enforcing punishment in these situations. Finally, political violence is becoming increasingly important as a source of risk for foreign investors. Moran and West (2005, 8) note that, while expropriation claims have historically predominated among the claims received by OPIC, the number of political violence claims has been on the rise in recent years. Since its inception, in the late 1960s, OPIC has settled 279 political risk claims, of which 172 were for inconvertibility, 63 for expropriation, and 44 for political violence. However, of all the claims received by OPIC between 1991 and 2007, 59 were for political violence 17 , 37 for expropriation, and only 4 for inconvertibility (O’Sullivan, in Moran and West 2005, p. 30). O’Sullivan further notes that the high number of political violence claims reflects the “willingness of investors to stay on and rebuild in high-risk environments (e.g., Columbia, Haiti, Liberia, Rwanda, Sierra Leone) with the aid of OPIC insurance” (32). 3.2. Outcomes of political violence: Investors’ own accounts How exactly does political violence affect the investment environment in the host country? Below, I discuss the direct consequences of conflict for foreign investors. First, the augmented security measures in response to conflict or terrorism increase transaction costs (Frey et al. 2007, Collier 1999). In times of conflict, public resources are allocated inefficiently, since most of them are diverted to the military from output enhancing 16 Expropriation claims have the highest recoveries rate, XX% (O’Sullivan 2005, 47). 17 12 of these claims have been settled. 13

Authors: Mihalache, Andreea.
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background image
Andreea Mihalache
Updated: March 20, 2008
the poorest recoveries record (0%) among claim recoveries by OPIC
. Recoveries for
political risk claims are an outcome of negotiations between OPIC (an arm of the US
government) and host country governments. The failure to reach agreements when
political violence damages are involved is a sign of the difficulty of bargaining, holding
anyone responsible, and enforcing punishment in these situations.
Finally, political violence is becoming increasingly important as a source of risk
for foreign investors. Moran and West (2005, 8) note that, while expropriation claims
have historically predominated among the claims received by OPIC, the number of
political violence claims has been on the rise in recent years. Since its inception, in the
late 1960s, OPIC has settled 279 political risk claims, of which 172 were for
inconvertibility, 63 for expropriation, and 44 for political violence. However, of all the
claims received by OPIC between 1991 and 2007, 59 were for political violence
expropriation, and only 4 for inconvertibility (O’Sullivan, in Moran and West 2005, p.
30). O’Sullivan further notes that the high number of political violence claims reflects
the “willingness of investors to stay on and rebuild in high-risk environments (e.g.,
Columbia, Haiti, Liberia, Rwanda, Sierra Leone) with the aid of OPIC insurance” (32).
3.2. Outcomes of political violence: Investors’ own accounts
How exactly does political violence affect the investment environment in the host
country? Below, I discuss the direct consequences of conflict for foreign investors. First,
the augmented security measures in response to conflict or terrorism increase transaction
costs (Frey et al. 2007, Collier 1999). In times of conflict, public resources are allocated
inefficiently, since most of them are diverted to the military from output enhancing
16
Expropriation claims have the highest recoveries rate, XX% (O’Sullivan 2005, 47).
17
12 of these claims have been settled.
13


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