The Empire Effect: The Determinants of Country Risk in the First Era of Financial Globalization


This article 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 noncolonies precisely because of their colonial status, which mattered more than either gold standard adherence or the sustainability of fiscal policies. The “empire effect ” was, on average, a discount of around 100 basis points, rising to around 175 basis points for the underdeveloped African and Asian colonies. Colonial status significantly reduced the default risk perceived by investors. t was obvious to contemporaries—among them John Maynard Keynes—that membership in the British Empire gave poor countries access to the British capital market at lower interest rates than would have been required had they been politically independent. For liberal critics of the empire, this “empire effect ” seemed detrimental to the economic health of the British Isles, which might otherwise have attracte

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