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INCRAAN INTERNATIONAL NON-PROFIT
CREDIT RATING AGENCY
UNITED STATESOF AMERICARATING REPORT
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With this report, we want to make an additional contribution to one of the most pressing challenges of the global financial
world: how to conduct sovereign ratings. For almost two years now, the Bertelsmann Foundation has been committed to
improving major shortcomings of the sector from two angles. The first relates to the institutional and legal framework. The
second is aimed at increasing the transparency and overall quality of sovereign ratings.
In spring 2012 the Bertelsmann Foundation launched its first report that answered both of these key questions. In that
report, we developed an institutional framework and governance structure for the first International Non-profit Credit
Rating Agency, called INCRA. Additionally, we developed a comprehensive set of forward-looking, qualitative indicators to
be used to improve the quality of sovereign ratings. These indicators complement the traditional macroeconomic ones.
In the second phase, we put our indicators to the test by simulating a sovereign rating process for five countries: Brazil,
France, Germany, Italy and Japan.
Given the tremendous amount of interest expressed during the first two rounds, we have produced a third report. In
an effort to further demonstrate the viability of our INCRA model, we decided to rate the most powerful and one of the
most complex countries in the world: the US. We gathered a team of economists and political scientists from around the
world, albeit with US expertise, to join our rating committee to assess the US today and over the next three to five years.
The simulation of a US rating took place with one key question at its center: What is the ability and willingness of the US
government to repay its debt on a timely basis?
The overall engagement in our INCRA project demonstrates that we define ourselves not only as a think tank, but also as a
“do tank.” In today’s world, the Bertelsmann Foundation believes that an important part of our mandate, as a responsible
actor and representative of civil society, is not only to propose innovative social change, but also to support its realization.
With this in mind, the Bertelsmann Foundation will continue its efforts to broadly communicate and help implement the
INCRA model.
Aart de Geus Annette HeuserPresident and CEO Executive DirectorBertelsmann Stiftung Bertelsmann FoundationGütersloh, Germany Washington, DC, USA
April 2013
FOREWORD
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TABLE OF CONTENTS
Foreword 1
Introduction 5
US Rating Radar 8
US Rating Report by Vincent Truglia, International Economist
and Publisher of clearandcandid.com and former Head,
Sovereign Risk Unit, Moody’s Investors Service 9
US Macroeconomic Data 18
US Forward Looking Indicator Report by Michael Mandelbaum,
Christian A. Herter Professor and Director of American Foreign Policy
at The Johns Hopkins School of Advanced International Studies 21
Conclusion 47
INCRA Ratings Scale 49
Macroeconomic Indicators Codebook 50
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This US Rating Report is a follow-up to the country ratings
of Brazil, France, Germany, Italy and Japan which we
published last fall, based on the methodology in our report
“A Blueprint for INCRA: An International Non-Profit Credit
Rating Agency,” released in April 2012. INCRA presents
a new model, both in its institutional setup and its
methodology, for developing a credit rating agency (CRA)
to assess sovereign risk. The INCRA proposal emphasizes
a governance structure that would allow the institution
not only to be a non-profit, but also to avoid potential
conflicts of interest, as well as reflect the needs of the
international financial system. The new set of indicators
for assessing sovereign risk proposed by INCRA was put to
a test in our initial sample ratings report. In rating the US,
INCRA’s methodology has been applied as rigorously as
before to rate the world’s premier economy.
Why INCRA Makes a DifferenceThe 2008 financial crisis served as a catalyst to bring the
shortcomings of the financial sector to the attention of the
broader public. In particular, the operations and results of
credit rating agencies were put under the microscope. CRAs
specialize in the professional provision of credit ratings
to overcome information asymmetries between investors and
debt issuers.1 They are knowledgeable intermediaries that
facilitate the exchange of capital between supply-side
and demand-side actors. They inform investors about the
likelihood of receiving all principal and interest payments,
as scheduled, for a given security. In other words, they
answer the question: What is the probability of default?
From our point of view, the issue of sovereign risk
assessment needs to be addressed from two angles:
• The legal and organizational framework: Do we need
alternative institutions to the traditional for-profit
CRAs? Who is responsible for conducting research?
• The quality of the analysis provided: Is the current
set of indicators used by CRAs to evaluate a country’s
willingness and ability to repay debt sufficient? Do
we need a more comprehensive set of indicators that
will also increase the predictability of a government’s
financial performance?
Our proposed agency, INCRA, would be a non-profit,
international network of offices and utilize a new legal
framework based on an endowment solution to guarantee
a sustainable long-term existence. Financially supported
by a broad coalition of funders, from governments to
corporate players, non-governmental organizations
(NGOs) to foundations and private donors, it would
be an independent entity. INCRA would be based on a
robust governance model that would minimize and buffer
potential conflicts of interest. Specifically, a Stakeholder
Council would separate the funders from agency
operations. The agency would have offices in Europe, the
US, Latin America and Asia.
In order to evaluate a country’s ability and willingness to repay
its debts, a more comprehensive set of indicators is needed.
INCRA would conduct its sovereign risk assessments
based on a set of macroeconomic and forward-looking
indicators (FLI) that would provide the basis for high-
quality analysis. These FLI aim to capture a meaningful
picture of a country’s long-term socioeconomic and
political prospects, and therefore potential political
and/or social constraints on a government’s ability and
willingness to repay debt.
INCRA would pay tribute to the fact that the financial
world needs greater buy-in and participation from many
different actors in society, including governments and
NGOs. It would also reflect the realities of an increasingly
globalized financial world, where the quality of sovereign
ratings is crucial not only for Europe and the US but also
for emerging economies such as China and Brazil.
The Value-Added of a US RatingThe INCRA team welcomed the challenge of rating the US,
which has the world’s largest national economy. As one
of the most powerful countries in the world, the US has
successfully overcome the immediate aftermath of the 2008
financial crisis, but is now facing new political challenges
of increasing partisanship and political gridlock. As
Europe continues to grapple with the immediate issues
of its own debt crisis, the US is beginning to assess how
to move forward in a post-crisis economy. Therefore, now
is an ideal time to take a look at the state of the US. As
noted above, we have utilized the INCRA methodology
developed in our original blueprint, trying to maintain
a systematic approach that ensures comparability and
consistency with the five previous sample ratings.
Combined with the previous five sample ratings, with the
US rating we want to demonstrate that INCRA can:
• produce sovereign ratings that are based on a
comprehensive set of macroeconomic indicators,
INCRA USA Ratings Report
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INTRODUCTION
1 Coffee, John C. (2011). “Ratings Reform: The Good, the Bad, and the Ugly.” Harvard Business Law Review, Volume I and Katz, Jonathan; Salinas, Emanuel & Stephanou, Constantinos (2009). “Credit Rating Agencies. No Easy Solutions.” World Bank Group Crisis Response. Retrieved from http://rru.worldbank.org/documents/CrisisResponse/Note8.pdf.
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which are quantitative by nature, as well as FLI, which
are qualitative reflections of the socioeconomic
developments within a country.
• significantly increase the transparency and
understandability of a sovereign rating. Our team has
created a “rating radar” that presents a snapshot overview
of a country’s major strengths and weaknesses. We also
provide all the background material that has been used
in determining our sovereign ratings. Additionally, we
provide a clear overview of the methodology and process
that we followed in producing each sample rating.
We cannot stress enough the point that ratings are opinions
that can and should be challenged. Yet though they may
be subjective, that does not mean that they do not add
value. In spite of all the criticism that sovereign ratings
in particular have received in the past, they continue to
serve a major purpose: aggregating information regarding
the credit quality of borrowers, in our case sovereign
entities. Ratings are a subjective assessment of the ability
of countries to meet their debt obligations. The overall
information sovereign ratings provide may prove relevant
in helping to provide a foundation for other financial
actors to assess credit risks.
The Underlying Methodology and the ProcessIn our first INCRA report, we presented a detailed overview
of the comprehensive set of criteria that informs our
sovereign risk assessments. Definitions and applications
of these two sets of quantitative and qualitative indicators
have been further developed in two codebooks, included in
the previous sample ratings and at the end of this report.
The codebooks have served as a basis for each “country
committee” that we assembled for each country we
rated. On each committee, we had a balanced number of
economists, political scientists and other social scientists.
The US country committee followed the same procedures
as the previous ones, applying the same indicators in the
codebooks and discussing differing opinions as well as
the indicators that are most important in the medium and
long term. The steps each country committee took were
as follows:
1. A selected country expert produced a country report
based on the FLI codebook.
2. At the same time, the macroeconomic data for
the country was assembled from sources such as
the Organization for Economic Cooperation and
Development (OECD), the International Monetary Fund
(IMF), as well as national sources.
3. Each country committee call started with an extensive
discussion of the macroeconomic indicators and a
presentation of the expert’s report based on the FLI,
followed by a discussion among all members of the
committee. After they had reviewed all aspects of the
country and weighed all the arguments, each member
was asked to give his/her scores for macroeconomic
and FLI performance. The scores ranged on a scale
from 1 (very bad) to 10 (very good). If a score on one
indicator had a spread that was higher than four points,
the committee revisited it to discuss the discrepancy.
Where it was not possible to bridge the varying expert
opinions, the differences are made clear in the rating
report. Each committee had a minimum of five and
a maximum of nine voting members, each with an
equal vote.
4. The experts’ opinions are reflected in each rating report,
produced and finalized by a team of two designated
sovereign risk experts. Country experts also reviewed
each rating report.
5. Afterward, the scores were added up and weighted
according to a weight scheme that assigns different
weights depending on a country’s per capita income,
divided into high-income, middle-income and low-
income countries. For example, INCRA proposes
for high-income countries such as the US to weight
macroeconomic indicators 40%, while FLI would be
weighted 60%.
6. Finally, the overall scores were aggregated and the
averages calculated to produce a rating.
The presented sample ratings are global, not regional,
meaning they do not simply compare a country’s
performance with that of its regional peers, but rather
with global peers. This global approach allowed us to
produce consistent ratings to be used to compare the
probability of timely repayment of principal and interest
across countries. It was of particular importance for us
to guarantee the comparability of the US report with its
European counterparts, Germany, France and Italy, that we
had rated in the earlier phase.
The ResultsIn 2011, some European countries faced credit rating
downgrades for the first time in recent history2—as
well as the US for the first time ever. In light of these
downgrades and their critical timing, the acceptance,
transparency and legitimacy of sovereign ratings have
been called into question.3 Although there might be some
marginal impacts on funding costs, such costs are not
usually significant at the upper end of the rating scale.
However, many view sovereign downgrades, first and
foremost, as insults to a country’s national performance
and its overall status.
Rather than settling for defining sovereign ratings as
accessible to and understood only by a select few, we
prefer to redefine them as a public good. Sovereign ratings
that affect the future of countries and their citizens need
to be non-rivalrous and non-excludable,4 meaning everyone
has the same right and access to “consume” them. CRAs
are the main actors in the field of analyzing sovereign risk.
The future borrowing power and financial well-being of
entire countries often rely on the ratings they are given.
In this report and the reports preceding it, we have
addressed the questions of how to more transparently rate
a highly sensitive and critical asset class such as sovereign
bonds and how to produce the highest-quality ratings.
Increasing the quality is important, because if ratings
continue to fail to mirror financial realities, they will
become less relevant over time. We already have initial
indications of this in that following recent downgrades of
some European governments, investor reaction was much
more muted than expected. Some argue that this may be
explained as a result of investors having already taken into
account the risk of downgrades and therefore concluding
that some ratings were already too positive.
From a rating perspective, at the very upper rating levels,
there should be little chance of an actual default on a
security rated AAA, AA or A. A downgrade might reflect
heightened credit risk throughout the global economy.
Under those circumstances, even if a government is judged
to have a marginally higher credit risk than before, there
may be reasons for investors to want to buy even more of
those government securities.
If a government is suffering from a decline in revenue, to
remedy that, a government might increase taxes. If there
is excessive government spending, spending cutbacks
might occur. Both policy changes would usually be judged
a credit negative for other issuers in a country. In addition,
especially for large, wealthy countries, such as the US,
Japan, Germany and France, government bonds are usually
the most liquid security in financial markets. In a period
of uncertainty, liquidity has an extra value. Therefore,
there is no particular correlation between rating changes
for highly-rated sovereign debt and local interest rates on
that debt.
In the US report, as in the five previous rating reports,
we have tried to be as transparent as possible about our
process. INCRA gives the US a AA+, with a stable rating
outlook. The US is not an exception—quite the contrary,
our US rating result confirms a worldwide trend. Since
the financial crisis broke in 2008, the pool of government
bonds with triple-A status by the three major private-
sector CRAs has declined more than 60 percent. There
can be no doubt that the era of AAA sovereign ratings is
over for the time being. So instead of complaining about
downgrades, governments and citizens alike should
think of them as constructive blueprints for domestic
reform. We hope that our US report sets an example of
how a sovereign rating of a highly complex country, where
decision-making processes are either constantly in flux
or in gridlock, can still be provided in a comprehensive,
consistent and transparent way.
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2 Downgraded countries include: France, Austria, Slovenia, Slovakia, Spain, Malta, Italy and Cyprus. See: Tymkiw, C. and Rooney, B. (2012). “9 Eurozone nations downgraded by S&P.” CNNMoney. Retrieved from http://money.cnn.com/2012/01/13/markets/sandp_europe_downgrade/index.htm.
3 Tichy, Gunther. (2011). “Credit Rating Agencies: Part of the Solution or Part of the Problem?” Intereconomics, Volume 6, Number 5. Retrieved from: http://www.ceps.eu/content/intereconomics-vol-46-no-5-septemberoctober-2011-0. Article critical of the CRAs for reacting too late and not having transparent criteria for sovereign debt ratings.
4 Stiglitz, Joseph. (1999). “Knowledge as a Global Public Good.” Global Public Goods: International Cooperation in the 21st Century. Inge Kaul, Isabelle Grunberg, Marc A. Stern (eds.), United Nations Development Programme, New York: Oxford University Press. Retrieved from: http://cgt.columbia.edu/files/papers/1999_Knowledge_as_Global_Public_Good_stiglitz.pdf and Holcombe, Randall G. (1997). “A Theory of the Theory of Public Goods.” The Review of Austrian Economics Volume 10, Number 1. Retrieved from: https://mises.org/journals/rae/pdf/R101_1.PDF.
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UNITED STATES OF AMERICARATING: AA+, Stable Outlook
Economic Fundamentals
Public SectorFiscal Policy
Monetary Policy
Capital MarketsFinancial Risks
External Sector
Rule of Law
Transparency Accountability
Social Cohesion
Future Resources
Strategic Capacity
Implementation
Adaptability
Crisis Management
9.4
8.9
6.9
7.5
7.6
6.86.7
7.3
7.5
8.2
9.3
7.5
8.4
AA+7.8
MacroeconomicIndicators
Forward LookingIndicators
7.68.2
10 8 6 4 2 2 4 6 8 10
Pros:
• World’slargesteconomyforyearstocome
• Diversified,wealthyandhighlyproductiveecono-my,inparticularinthevitalservicessector
• World’slargestanddeepestfinancialmarkets
• Flexiblelabormarkets
• Rapidlyrisingdomesticenergyproduction
• Highlydevelopedcivilsociety
• Strongtraditionofruleoflaw
Cons:
• Debt/grossdomesticproduct(GDP)ratiofarhigherthanthehistoricalnorm
• Debt/revenueratiofarhigherthanitspeers
• Lossesinshareofworldmanufacturingtradegreaterthanthoseofitspeers
• Ongoingpoliticalgridlock
• Growingincomeinequality
• World’scostliesthealthcaresystem
INCRA USA Ratings Report 9
SummaryThe United States is still by far the largest economy in the
world. Despite losses in its share of world manufacturing
trade, it remains one of the most competitive, diversified,
wealthy and productive nations on earth. Its recovery
from the recent Great Recession has been slow, but
steady. Some academic economists argue that recovery
from a financial/banking-induced crisis is usually slower
than recovery from recessions caused by other factors.
However, when viewed against the depth and breadth of
the 2008 financial/banking crisis, the US demonstrated a
greater resiliency than most of its peers.
The National Bureau of Economic Research (NBER) dates
the Great Recession from December 2007 to June 2009.
During that time, US output dropped by an estimated
5.1 percent. As a result of the sudden collapse of the
real estate market, US and world financial markets faced
the risk of a complete meltdown, especially following the
sudden bankruptcy of Lehman Brothers in September
2008. However, the federal government proved capable of
rapidly dealing with the crisis, albeit with more political
melodrama than was probably necessary.
In late September 2008, Congress initially rejected a
financial market bailout proposal. This rejection caused a
sudden and dramatic drop in US stock markets. Congress
quickly reversed itself and in early October 2008 approved
$700 billion in funding for the Troubled Asset Relief Program
(TARP). This bailout, when coupled with the actions of an
unfettered and imaginative Federal Reserve, appears to
have averted what could have easily become an even more
severe economic downturn, if not an outright depression.
After a sharp rise in unemployment, a steep decline in
household wealth caused by the sudden drop in real
estate prices — a decline greater than witnessed during
the Great Depression — and dropping stock prices, the
federal government undertook significant stimulus
policies well beyond the initial TARP program. In 2009,
Congress passed a stimulus program estimated to have
cost about $790 billion by 2012. It was three-pronged,
with 1) tax cuts; 2) increased direct federal spending
on unemployment benefits and education; and 3) job
creation through federally funded projects and/or loans.
In December 2010, the federal government also temporarily
extended the so-called Bush tax cuts. This extension and
a few added features, including a temporary cut in the
payroll tax, added $860 billion more in stimulus.
As we will see, for most macroeconomic indicators the US
compares well with its peers, except those related to general
government debt. However, the US’s general government
debt ratios were not the primary drivers of its rating, since
overall the US still scored at an AAA level regarding purely
macroeconomic indicators. Rather, the committee found
the US scoring lower on a number of forward-looking
indicators (FLI), especially those related to political
gridlock and growing income and social inequality.
Because of this, and because sovereign ratings are meant
to be forward-looking as opposed to a snapshot of a
single point in time, the committee overwhelmingly voted
for scores consistent with a AA+ rating. It should also be
noted that some members of the committee produced
scores more consistent with AA.
Since the reasons for the rating outcome are more
closely related to long-term issues, the rating carries a
stable outlook. That outlook could change if the general
government debt ratios were to rise and/or political
gridlock becomes even worse. Since the committee found
the question of gridlock particularly relevant, it should
be noted that it expects it to eventually be overcome or
institutionalized in a way supporting a AA+ rating with
a stable outlook. However, if the gridlock worsens or
becomes more disruptive going forward, the outlook and/
or the rating would likely change.
The EconomyAs noted above, real GDP growth since the end of the
recession has remained lackluster. After real GDP growth
of three percent in 2010, the economy grew by a modest
1.7 percent in 2011, with a two percent rise in 2012. Most
forecasts for 2013 call for GDP to grow by between 2.3
and 3.3 percent. Growth is expected to be strong in the
first quarter because of the rebuilding efforts related to
Hurricane Sandy. It is expected to slow moderately in the
second quarter and continue at a more moderate level
for the second half of 2013. It appears that the short-term
boost to the construction sector from hurricane rebuilding
may be outweighing the headwinds coming from fiscal
policy. This seems to explain the somewhat unexpected
outperformance of the economy in the first quarter. Once
the effects of reconstruction drop off, more fundamental
factors will likely prevail in moving the economy forward.
For instance, in January, payroll or Social Security taxes
rose from 4.2 percent to 6.2 percent. This will bring in an
extra $100 billion in revenue. Sequestration, or binding
cuts in federal spending, will cost the economy about $42
billion in fiscal year (FY) 2013, which ends in September.
The remaining $42 billion of sequestration cuts will not
hit the economy until FY 2014 and beyond. According
to the Congressional Budget Office (CBO), without the
fiscal tightening already in place, growth would be about
1.5 percent higher in 2013. That implies that without
sequestration, real GDP in 2013 would be expanding
between 3.8 and 4.8 percent, thus achieving growth rates
not seen since the 1990s.
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Despite the fiscal headwinds and the drop-off in hurricane
reconstruction spending, some forecasters are more
optimistic about medium-term growth prospects going
forward because the US housing market seems to have
begun to rebound. House prices are no longer falling.
In most regions they are rising, albeit still remaining far
below their pre-crisis levels. Mortgage rates are still at
historically low rates, and the rate of foreclosures has
fallen significantly. Housing inventories are down.
A turnaround in housing is important for the direction of
the economic outlook because not only does it create a
positive wealth effect, but new home construction and/
or existing-home purchases have an important knock-on
effect on industries closely related to housing, such as
appliance manufacturers and household goods suppliers.
Growth in 2014 is expected to be similar to 2013 and
could remain in the range of 3 to 3.5 percent over the
next several years. To put this into context, during the
five-year period 1996–2000, real GDP grew on average by
4.2 percent a year. During the five years prior to the start
of the Great Recession, annual GDP growth averaged 2.5
percent. Therefore, overall growth over the next several
years is expected to outpace the pre-recession average,
but not be quite as good as witnessed in the latter 1990s.
Looking at the components of GDP growth, we find that
last year real private consumption grew by 1.9 percent.
Domestic investment grew by 9.8 percent, with residential
investment rising by a comfortable 12.1 percent, following
a string of years of decline. Export growth again outpaced
import growth, with exports rising by 3.4 percent and
imports by only 2.4 percent. The government sector
once again acted as a drag on GDP, as real federal
government spending declined by 2.2 percent. State and
local government spending also again declined, but at a
slower pace, 1.4 percent compared with a decline of 3.4
percent in 2011. The drag on GDP growth caused by the
governmental sector predates sequestration, which began
in March 2013.
InflationInflation has remained subdued during this recovery,
despite the enormous monetary stimulus the Federal
Reserve injected into the economy. So far, the stimulus
has not fueled inflation expectations. These expectations
are essential as they influence key drivers of inflation, such
as wage-price pressures and excessive investment in fixed
assets, The CPI, excluding volatile food and energy prices,
rose by only 0.8 percent in 2010, 2.2 percent in 2011 and 1.9
percent in 2012. Given that the US economy is performing
below capacity, excessive inflationary pressures are not
likely to emerge for several years.
What has concerned many observers about the medium-
term inflation outlook is the massive amount of monetary
stimulus that has been provided through unorthodox
measures, in particular quantitative easing (QE). QE is
basically a form of printing money. Historically, when
governments or their central banks resorted to the so-
called printing press, it almost inevitably ended badly,
resulting in high inflation and even, in some cases,
hyperinflation. There are countless examples of this in
Europe and Latin America. However, in all the historical
cases, QE occurred when an economy was prostrate after
military defeat, or was employed in an emerging-market
country where the government was unwilling or unable to
raise enough revenue to pursue its goals. As such, more
money was chasing the same amount of goods. The result
of such actions was inflation.
In the case of the US, QE has been used because the
usual financial market transmission mechanisms have not
functioned normally. Putting it another way, the velocity
of money has fallen. In most countries where QE was used
to excess, capacity constraints, not velocity, were the core
problem. In the case of the US, velocity is key. Will a day
arrive when velocity naturally picks up and inflationary
expectations accelerate? Yes, but there is no evidence
that it is imminent. Nonetheless, unwinding QE remains a
potential risk in the medium term.
Labor MarketsThe US has one of the most flexible labor markets in the
developed world. The Great Recession caused a steep
increase in joblessness, with the unemployment rate
peaking at 10 percent in October 2009. Although this was
below the previous post-World War II peak of 10.8 percent
reached in November–December 1982, the unemployment
rate has not dropped as quickly as in past recoveries. By
February 2013, the rate had fallen to 7.7 percent.
The number of long-term unemployed, those who have
been without work for 27 weeks or more, remained
unchanged at about 4.8 million, or 3.1 percent of the
labor force. This group accounted for 40.2 percent of total
unemployment. This is estimated to be about three times
higher than the rate recorded in the early part of the last
decade. There is a debate as to the causes of this major
change in employment, but it is too soon to know for sure
whether it will remain an ongoing problem or will slowly
ease as the overall unemployment rate drops further.
Another 2.6 million people were considered marginally
attached to the labor force: that is, they had looked for work
over the past 12 months, but not for the last four weeks. Of
that 2.6 million, only 885,000 were considered discouraged
workers, or those who had simply given up looking for jobs.
The rest of the 1.5 million had valid family or educational
reasons to be outside the labor force.
The CBO estimates that sequestration will result in 775,000
INCRA USA Ratings Report 1 1
fewer jobs than if sequestration had been avoided. That is
equal to about 0.5 percent of the labor force.
The real estate crisis negatively affected labor force
mobility in the US. Unlike that of many other countries, the
US labor pool is quite mobile. However, as house prices
fell, many workers lost their ability to sell their homes and
move to other regions to pursue new job opportunities.
Furthermore, some might argue that support from the
government to individuals to service mortgage debt
may have reduced the incentive to move. As the housing
market returns to health, labor mobility should once again
return to historic norms.
The Banking SectorAfter the near-meltdown of the financial system in 2008
following the bankruptcy of Lehman Brothers, the federal
government and the Federal Reserve proved that both
would make sure that the banking sector and related
financial services firms that were systemically important
would not collapse. The $700 billion TARP program
provided more than enough funds to support the banking
system, as well as the two major mortgage lenders, plus
AIG, Bear Stearns and the automakers. Although we do
not yet have the final figures, given what has happened to
date, the federal government will likely not have lost any
money as a result of the bank bailout program.
There is much discussion about resisting too-big-to-fail
moral hazard issues. We should keep in mind the difference
between a bank failure and a bank default. Depending on
how a bank is wound down or how regulators intervene
following its failure, a bank might still avoid defaulting
on deposits or other financial instruments. The reality
is that in recent decades the US banking industry has
become ever more concentrated into fewer and fewer
banks. In 2011, according to the Dallas Fed, the largest five
US banks had 52 percent of banking assets. The next 95
largest banks accounted for 32 percent of all bank assets.
Therefore, despite all the discussion about allowing banks
to fail, given the size of most US banks and their systemic
importance it is unlikely that the largest ones will ever
be allowed to default, at least not on deposits. As such,
despite the rhetoric, the US banking sector should be
viewed as a contingent liability of the federal government.
However, at the same time, it is difficult to imagine an
economic scenario in which the banking sector would be
under more stress than already experienced in 2008–2009.
As noted above, the long-term cost to the US government
of that bailout will prove to be minimal, if anything at all.
The External SectorExploring the US external sector presents a variety of
analytical problems. On the surface, the US regularly runs
large current account deficits. To finance these deficits,
the government has either borrowed money or sold assets
to foreigners. This results in a large net international
debt now estimated at over several trillion dollars. The
analytical problem is that ongoing current account deficits
and a significant net foreign debt should result in a net
income outflow in the current account. Yet despite years
of large deficits and the large net debt, the net income
flow is always positive. This means that despite a large
and growing net debt, US residents still earn more on
their foreign investments than foreigners do on their
US investments. Put differently, the net foreign equity
position of the US is still positive and will likely become
even more positive with the recovery of international stock
markets and other asset markets.
Therefore, if one simply looks at the debt stock and net
changes in it, the US would score low. However, when
looking at the cost of financing this debt, even over many
years, it appears to be cost-free. In fact, as noted above, the
US remains a net recipient of foreign investment income,
instead of the other way around. Looked at it from that
perspective, the US external position is quite healthy.
In 2011, net income as recorded in the current account
totaled $227 billion, and in 2012 it was $199 billion.
Analysts have been predicting that the net income flow
would eventually turn negative — but for decades, despite
those predictions, it has not.
The US Dollar as a Reserve CurrencyThere was a vibrant debate within the committee on the
impact of the special role the dollar plays in international
financial markets. The traditional terminology used, reserve
currency, has had a changing meaning over the years.
From the end of World War II until 1971, the international
foreign exchange regime was based indirectly on gold.
Indirectly is meant in the sense that the willingness of the
US to exchange dollars for gold, at a fixed price, was the
centerpiece of the system. In that era, the US was truly a
unique currency (unique in that few other large nations had
enough gold to fully support their currencies). In 1971,
the US formally broke the relationship between the dollar
and gold. From then on, the meaning of reserve currency
changed. Any currency that was widely accepted for use in
international transactions could appropriately be labeled
a reserve currency.
Since 1971, the dollar has remained the world’s preeminent
currency. Many argue that as such, the US continues
to have an advantage in that foreigners may have a
desire and/or need to hold dollars in excess of normal
requirements. This is seen as an important explanation
of why despite large current account deficits over many
years, the demand for the dollar remains strong, allowing
long-term US interest rates to remain lower than they
otherwise would be.
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For those who accept this argument — probably
representing the vast majority of analysts — the role of
the US dollar as the world’s major reserve currency is an
important strength for the US and its government’s ability
to fund itself, and therefore for the country’s credit rating.
By implication, if there is a threat to that reserve status, it
should have a negative impact on the rating.
There was a minority view on the committee that argued
because the dollar is a fiat currency, the Federal Reserve
has always had theoretical control over the entire yield
curve. However, until the adoption of unorthodox
monetary policies by the Federal Reserve beginning in
2008, yield curve flattening remained theoretical. Since
2008, however, flattening has occurred with a vengeance.
This appears to show that when necessary, the Federal
Reserve can and will intervene heavily even in long-
dated securities. The implication of this, it was argued,
is that even if foreign owners of US financial assets were
to sell those assets suddenly, Federal Reserve action
might completely mitigate or even reverse the effect on
US interest rates. The only impact such asset sales would
then have would be on the exchange rate of the country
attempting to dispose of its US assets. As such, a minority
on the committee felt that reserve currency status is
less important today to the US than Federal Reserve
willingness to undertake unorthodox monetary policies.
Public Sector and Fiscal IssuesDuring the rating process, we have tried to use data that is
comparable across countries. To date, this has not posed
an analytical problem. However, in the case of the US,
using general government debt data distorts the analysis.
OECD reports indicate that general debt statistics, while
statistically comparable across countries, analytically
exaggerate debt in some instances, particularly in the US.
To put it simply, since the US handles its pension programs
in a different way from most other wealthy countries, when
using general government debt, this tends to exaggerate
the US debt burden.
The main difference in approach is that US government
pension obligations are handled using an unusual
accounting practice—at least unusual for national
governments—by creating a liability for future pension
obligations. For instance, because payroll taxes to fund
the pension system are in excess of outgoing pension
payments, the excess tax revenue is used to purchase non-
marketable US Treasury debt. Basically, for public finance
purposes, this is an accounting fiction. Most other countries
use a variant of pay-as-you-go pension systems, so they still
have a similar implied liability to future pensioners but
avoid the creation of additional government debt. From a
long-term perspective, there is no difference between the
two approaches.
Besides pension-related debt, the US also has a number
of other similar trust funds created to sponsor other
government activities. The difference between marketable
federal government debt and total federal government
debt is significant (31.7 percent of US GDP in 2012).
Given the accounting fiction, it appeared reasonable to
the committee to exclude such trust fund obligations from
the US debt numbers when making comparisons across
countries.
The US also poses another interesting problem when trying
to make international comparisons. General government
debt includes the debt of state/provincial and local
governments. In most countries, this is not a controversial
idea, since to varying degrees national governments are
usually seen as wholly or partially responsible for lower
levels of government. For instance, in Germany, there are
strict and binding constitutional arrangements in place
to handle joint liability issues. In Spain in recent years,
though it was not constitutionally required to do so, the
Spanish government felt obliged to step in and provide
financial support for provinces in financial difficulty.
In the US, not only is there no such legal obligation for
the federal government to come to the rescue of state
and local governments, there is a long history of it not
stepping in when states or municipalities are in financial
distress. The one and only exception, federal aid to New
York City after it defaulted in 1975, arguably proves the
general rule. Given this laissez-faire tradition, some argue
that when examining US creditworthiness, state and local
government debt should be ignored.
The committee concluded differently for the following
reasons. Although the US federal government is not likely
to find itself in a situation where it will rescue problematic
state and local governments, the fact that these levels of
governments play an outsized role in the US implicitly
affects the ability of the federal government to adjust its
own fiscal policy.
In 2012, state and local government debt accounted for
19 percent of US GDP. These levels of government provide
a vast array of services that elsewhere are often provided
by national governments. US state and local governments
also have widely varying tax policies.
Most states, plus some cities, have local income taxes.
There are various state and local sales taxes. Local real
estate taxes are the rule. Because these are important
deductions for federal income tax purposes, and because
there are very different tax burdens on individuals
depending on their state or locale of residency, changing
these deductions may prove difficult in practice given
regional resistance. Since state and local government
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finances affect federal fiscal flexibility, the committee
deemed it appropriate for purposes of international
comparison to include their debts when calculating the
US equivalent of general government debt.
In the table above the figures for the US use federal
government held by the public plus state and local
government debt as the US equivalent of general
government debt. The IMF/OECD definition of government
debt is used for the four other countries. As can be seen,
while US “general government debt” for analytic purposes
was 58.3 percent of GDP in 2008, it had climbed to 93.2
percent in 2012. The US debt ratio was better than that
of its peers in 2008. By 2012, it was worse than Germany’s
and slightly worse than France’s.
The debate about the deficit centers around the federal
government, rather than state and local governments, many
of which have balanced-budget requirements. As such, we
will discuss the issue in terms of the federal deficit.
Using CBO projections, we find that the federal deficit
declines from 5.3 percent of GDP in FY 2013, to 3.7
percent in FY 2014, to 2.4 percent in FY 2015. It should
be emphasized that these are projections, not forecasts.
They assume that existing laws will remain in place
and the overall economic environment will follow an
expected pattern. Nonetheless, they are valuable in that
given the present political environment in Washington,
it doesn’t seem likely that there will be any major new
spending programs, and/or revenue measures that would
significantly change the already embedded pattern of
declining deficits. Therefore, the overall debt/GDP ratio
should stabilize and start declining as early as FY 2014 –
FY 2015.
According to the CBO, there is a risk that federal deficits, as
a percent of GDP, could once again start rising beginning
in FY 2018. The committee expects that increases in
deficits in later years will relate to increased entitlement
spending. It appeared reasonable to the committee to
assume that some entitlement reform is likely by 2018,
and that therefore the projected rise in deficits starting in
FY 2018 will not likely occur. If that proves to not be the
case, then clearly there would be downward pressure on
the rating.
Forward-Looking Indicators
Rule of lawThe US scored highly in the rule of law category. It was
recognized that the US legal system is both respected
and its laws generally obeyed. For instance, even in the
hotly contested legal dispute over the 2000 presidential
election, a verdict by the Supreme Court regarding who
won was accepted as binding by all sides. The US scored
even more highly regarding the independence of its
judiciary. At the federal level, the judiciary is viewed as
highly independent. There were some minor concerns
raised in the committee because in some states, local
judges are elected. Despite this, committee members
felt that because lower court rulings are easily appealed,
they could still view the judiciary as a highly independent
branch of government.
Separation of powers was viewed as extremely strong.
However, the committee noted that it was so strong at the
federal level that although normally a sign of a healthy
democracy, in the US case the separation of powers
appears to have unintended consequences, as witnessed
by today’s political gridlock.
Property rights were also scored highly, despite the fact
that there was some concern expressed about excessive
use of eminent domain.
Transparency and accountabilityThe US scored highly regarding government transparency
and accountability. In the section regarding prevention of
corruption, the committee noted that the US is generally
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General Government Debt
General Government Debt/GDP (%) 2008 2009 2010 2011 2012
US* 58.3 73.5 82.3 87.2 93.2
Italy 105.8 116.1 118.7 120.1 125.8
France 68.2 79.0 82.3 85.2 87.2
Germany 66.9 74.7 83.5 81.2 82.2
Japan 191.8 210.2 215.3 229.8 235.8
*ThisrowrepresentsUSgeneralgovernmentdebt/GDP(%),asourcommitteehasdefinedit.Thisexcludestrustfundobligations,butincludesstateandlocalgovernmentdebt
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regarded as suffering from only minor instances of corrupt
behavior, usually at the local level. In general, the public
does not view corruption as a major issue. In fact, it
appears that official corruption in the US is possibly lower
than it has ever been in its history.
There was little doubt among committee members that the
US media was independent of government interference.
Although there is a small public broadcasting network, the
majority of the public views it as among the least biased
sources of analysis. The rest of the media are privately
owned. Also, as elsewhere, the growing use of the Internet
has democratized news outlets in an unprecedented way.
The US also scored high regarding civil society
participation. Nongovernmental organizations are active
throughout all aspects of society. Although some would
argue that some voluntary organizations are slightly less
active than in the past, there appeared little doubt that
nongovernmental groups continue to play an active role
in US society, affecting such things as tax policy, foreign
policy, environmental regulation and education. Some
on the committee even argued that as with the separation
of powers indicator, civil society participation in the US
may be so high that it slows down the decision-making
process, and therefore might represent a slight negative.
Nonetheless, overall it was still viewed as a key strength
for the US.
Social cohesionAs noted earlier, the US rating was constrained by its
overall scores for forward-looking indicators. We have just
examined some of the FLI indicators where the US scored
relatively high. Now we will explore several where the US
scored somewhat lower.
The US scored poorly regarding social inclusion. The
country has relatively high income and wealth inequality
compared to almost all other advanced industrial
countries. It has a less generous welfare system than its
peers, and a heterogeneous population with persistent
issues related to its historic racial divide. Although much
progress has been made, problems of racism still exist. In
addition, as mass immigration is continually changing the
country’s demographics, the US will soon face a challenge
as it becomes a country with a majority composed of
minorities. Although the country has found it easier to deal
with immigration than most of its peers, the very size and
rapidity of the demographic change presently underway
will nonetheless be difficult to deal with, all the more so
because of the country’s growing economic inequality.
Between 2002 and 2007, people in the top 1 percent of the
American income ladder captured two-thirds of the total
gains from economic growth, and the top one-tenth of 1
percent captured fully one-third of the gains.
The US also scored low on trust in its political institutions.
Although the committee recognized that the US political
system is viewed as among the most stable in the world,
public opinion surveys indicate Americans appear to
have little faith in Congress. Also, voter participation in
the US is significantly lower than in most other advanced
industrial countries. Some interpret this as a signal that
many people view their vote as having little direct impact
on policies that affect them.
The US scored by far the lowest in the area of conflict
management. Since the mid-1990s, the federal government
has often faced gridlock. The two major political parties
have become so polarized that decision-making has often
become almost impossible. In the past, most issues could
be settled in a bipartisan fashion. That no longer appears
to be the case. The debt ceiling controversy of 2011, the
fiscal cliff debate of 2012, the use of sequestration in
2013, and the difficulty in getting cabinet and judicial
level appointments approved by the Senate all indicate
dysfunction. Each side may argue that it is the other’s
fault, but from a governance perspective, polarization,
albeit a relatively new phenomenon, is nonetheless an
increasingly significant risk. The US scored lower in this
category not only compared with its European peers, but
also compared with Brazil.
The US also scored low regarding policy implementation.
The divisions within the federal government have
become so pronounced that getting through new policy
initiatives of any sort appears unlikely. As discussed in the
committee, in the past when a US president proposed an
agenda in the annual State of the Union address, he would
likely find many of the proposals passed during his term of
office. Few would expect that to happen today.
Resource efficiency was another area of weakness. Here
the discussion centered on the federal civil service. It was
noted that in the 1930s, civil servants were highly regarded
and generally well compensated. Since the 1980s, civil
servant compensation at the federal level has generally
fallen behind that of similarly skilled private-sector
workers. In addition, the size of the civil service has not
kept pace with the demands put upon it by an increasingly
technological society. In addition, as already noted above,
since it takes so long for the Senate to approve senior
federal nominees, many highly qualified people are just
not willing to go through the now painful appointment
process.
AdaptabilityIn the two sections related to adaptability, when
the committee discussed both policy learning and
institutional learning, the US scored low. Again, this
related to the increasingly divided nature of the federal
government. It was noted that in the past, bipartisan
policies could be adopted if viewed in the national interest.
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Today it appears difficult for the two major parties to agree
on defining what is in the national interest. For example,
in the past, bipartisan commissions were frequently
appointed to resolve complex issues surrounding Social
Security or Medicare or to resolve important tax matters.
Today, even when such commissions are formed, their
recommendations are usually ignored.
Recent Political DevelopmentsIn November 2012, President Barack Obama was reelected.
In addition, Democrats ended up with a 53-seat majority
in the 100-seat Senate, along with two independents who
caucus with them. Republicans now have 45 Senate seats.
There are 435 seats in the House of Representatives, and
Republicans retained control of the chamber by winning
234 of them, while Democrats won 201.
The election resulted in a divided Congress, in which either
party can block the other party’s bills. The US has often
had divided government at the federal level, and it has
usually worked relatively well. However, since 2010, when
Congress once again became divided, there has been little
bipartisan agreement, at least unless the government was
faced with an imminent crisis.
The debt ceilingUnlike other advanced industrial countries, the US has a
debt ceiling that acts as the upper limit on how much the
federal government can borrow. This is an anachronism
that dates to a time when the Congress had to pass a
bill permitting every US Treasury bond issuance. At the
beginning of the 20th century, the process was streamlined
by simply putting in place an overall limit. The debt ceiling
has been raised on countless occasions ever since. Until
1995–96, it had never been a controversial issue; after all,
the ceiling only allowed debt issuance related to programs
and spending already approved by Congress. In 1995–96
for the first time, Congress threatened to not raise the debt
ceiling unless President Bill Clinton agreed to a variety
of measures. However, instead of agreeing to Republican
requests, he slowly shut down the federal government.
As pressure grew on the Republican Congress, which the
public was blaming for the standoff, eventually the debt
ceiling was raised in early 1996. It did not become an
issue again until 2011. Republicans took control of the
House of Representatives following the 2010 election. A
large contingent of them are supporters of the so-called
Tea Party, which advocates reducing the size of the federal
government by all means possible, and as a result political
battle lines were drawn.
By late July 2010, the US government was rapidly running
out of borrowing authority. The Treasury had already
used many of its traditional quick fixes to get around the
ceiling. There were some in the Tea Party caucus who
actually argued for not raising the debt ceiling even if it
meant that the federal government would default on its
debts. Cooler heads prevailed, and at the very last minute
a deal was struck to raise the debt ceiling — but not in a
clear nor long-lasting way. The new law was signed on Aug.
3, 2010, the day the Treasury was scheduled to run out of
borrowing authority.
The crisis was averted by creating a so-called
“supercommittee” that was charged with recommending a
deficit reduction package of $1.5 trillion before November
2011. (The actual requirements to avoid sequestration were
incredibly complex.) If the committee could not agree on a
recommendation, automatic-spending cuts, better known
as sequestration, were to take effect in March 2013. The
rules surrounding sequestration are as equally obtuse as
the requirements surrounding the supercommittee. It was
thought in 2011, that such a foolish and arbitrary policy
that might end in sequestration would never be allowed
to happen. Yet lo and behold, sequestration is now the
law of the land. This has produced the odd result that
governmental dysfunction in this special case actually
improved the capacity of the federal government to meet
its financial obligations because it lowered spending. At
the same time, the fact that dysfunction prevailed raises
concerns that future outcomes might not be as beneficial.
Additional Signs of DysfunctionThe Bush tax cuts were set to expire on Dec. 31, 2012,
meaning that massive effective tax increases were
scheduled to kick in on Jan. 1, unless an agreement on a
new tax law was reached. Nothing was done until the early
hours of Jan. 1, and lawmakers thereby avoided a sharp tax
increase, but only by going to the brink once again.
For now, the federal government is operating on a continuing
resolution. That basically means there is no budget, except
what has already been approved. By July–August 2013,
the US will once again bump up against another debt
ceiling limit. The issues with the debt ceiling remain the
same as they were in 2011. The rating committee noted
that Congress will most likely pass a debt ceiling increase
in time, and that some sort of bipartisan agreement
may eventually be reached on the budget. However,
the committee also noted that this is not the type of
governance associated with an AAA rating.
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MACROECONOMIC INDICATORS 8.2
Economic Fundamentals 8.4
RealGDPGrowth% 8.3
GDPPerCapita 9.2
RealExports(%Change) 7.7
RealImports(%Change) 8.8
GrossDomesticInvestment/GDP(%) 8.0
GrossDomesticSavings/GDP(%) 7.3
Inflation-CPI(%) 8.6
PopulationGrowth(%Change) 9.1
Public Sector / Fiscal Policy 7.5
GeneralGovernmentDebt/GDP(%) 7.0
NominalGDPGrowth(LocalCurrency%) 8.0
GeneralGovtDebt/GeneralGovtRevenue(%) 6.9
GeneralGovtInterest/GeneralGovtRevenue(%) 7.6
GeneralGovtPrimaryBalance/GDP(%) 8.0
GeneralGovtFiscalBalance/GDP(%) 7.7
GeneralGovtRevenue/GDP(%) 7.4
GeneralGovtExpenditure/GDP(%) 7.6
Monetary Policy 9.3
AccommodativeMonetaryPolicy 9.3
Capital Markets and Financial Risks 8.2
DomesticCredit/GDP(%) 8.7
DomesticCredit(%Change) 7.9
OverallStrengthofBankingSector 7.9
External Sector 7.5
CurrentAccount 7.5
ExternalDebt 7.4
Country Committee Average Scores
FORWARD LOOKING INDICATORS 7.6
Political Economic and Social Stability 8.2
Rule of Law 9.4
LegalCertainty 9.0
IndependentJudiciary 9.8
SeparationofPowers 9.0
PropertyRights 9.8
Transparency / Accountability 8.9
CorruptionPrevention 8.2
IndependentMedia 8.9
CivilSocietyParticipation 9.6
Social Cohesion 7.4
SocialInclusion 7.1
TrustinInstitutions 6.9
SocietalMediation 7.1
ConflictManagement 6.3
Future Resources 7.5
Education 6.8
ResearchandInnovation 9.3
Employment 7.9
SocialSecurity 7.0
EnvironmentalSustainability 6.7
Steering Capability and Reform Capacities 7.1
Strategic Capacity 7.6
Prioritization 6.8
PolicyCoordination 6.9
StakeholderInvolvement 8.6
PoliticalCommunication 8.1
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Implementation 6.8
GovernmentEfficiency 6.4
ResourceEfficiency 7.1
Adaptability 6.7
PolicyLearning 6.4
InstitutionalLearning 7.0
Crisis Management 7.3
HistoricalEvidenceofCrisisManagement 8.4
CrisisRemediation 7.2
SignalingProcess 7.2
TimingandSequencing 6.8
PrecautionaryMeasures 6.9
AutomaticStabilizers 7.2
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UNITED STATES MACROECONOMIC INDICATORS
I. Economic Fundamentals 2008 2009 2010 2011 2012f
NominalGDPGrowth(LocalCurrency%) 1.9 -2.2 3.8 4.0 4.1
RealGDPGrowth(%) -0.3 -3.1 2.4 1.8 2.2
RealExports(%Change)* 6.3 -12.0 14.3 7.2 5.3
RealImports(%Change)* -3.8 -15.6 14.9 5.2 3.3
NominalGDP(bnUS$) 14,291.5 13,973.6 14,498.9 15,075.7 15,653.4
GDPpercapita(US$) 46,901 45,674 47,024 48,327 49,802
GDPpercapita(PPPbasis:US$) 46,901 45,674 47,024 48,327 49,802
Inflation-CPI(%) 3.8 -0.3 1.6 3.1 2.0
PopulationGrowth(%Change) 0.9 0.9 0.8 0.7 0.9
GrossDomesticInvestment/GDP(%) 18.1 14.7 15.8 15.9 16.4
GrossDomesticSavings/GDP(%) 12.8 10.5 11.6 11.6 12.8
*Exports/Importsincludegoodsonly
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II. Public Sector Policy 2008 2009 2010 2011 2012f
GeneralGovernment(GG)Debt/GDP(%) 76.1 89.6 98.6 102.9 107.2
GGRevenue/GDP(%) 32.5 30.9 31.7 31.4 32.0
GGExpenditure/GDP(%) 39.2 44.2 42.9 41.4 40.6
GGFinancialBalance/GDP(%) -6.6 -11.9 -11.4 -10.2 -8.5
PrimaryBalance/GDP -4.6 -7.9 -7.6 -6.4 -5.3
GGDebt/GGRevenue(%) 234.1 290.0 311.0 327.7 335.0
GGInterest/GGRevenue(%) 8.4 8.0 8.3 8.9
III. Monetary Policy
IV. Capital Markets & Financial Risk 2008 2009 2010 2011 2012f
DomesticCredit(%Change) 5.3 -1.3 -1.1 6.7 3.5
DomesticCredit/GDP(%) 224.4 234.4 233.3 234.9
IV. External Sector 2008 2009 2010 2011 2012f
CurrentAccountBalance/GDP(%) -4.7 -2.7 -3.0 -3.1 -3.1
Datasources:BanquedeFranceAnnualReports;IMF’sArticleIV2012;OECDAnnualReports.
f = forecast
2 0
2 0
Macroeconomic Data Sources:
Nominal GDP GrowthOECD Economic Outlook, Volume 2012 Issue 2, Statistical Annex, Table 2http://www.oecd.org/eco/economicoutlookanalysisandforecasts/economicoutlookannextables.htm Real GDP GrowthOECD Economic Outlook, Volume 2012 Issue 2, Statistical Annex, Table 1http://www.oecd.org/eco/economicoutlookanalysisandforecasts/economicoutlookannextables.htm
Real Exports (% Change) IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?pr.x=58&pr.y=5&sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&c=111&s=TMG_RPCH%2CTXG_RPCH&grp=0&a=
Real Imports (% Change) IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?pr.x=58&pr.y=5&sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&c=111&s=TMG_RPCH%2CTXG_RPCH&grp=0&a=
Nominal GDP (US$)IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?pr.x=62&pr.y=5&sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&c=111&s=NGDPD&grp=0&a=
GDP per capita (US$ and PPP)IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weorept.aspx?sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=40&pr1.y=11&c=134%2C111&s=NGDPDPC&grp=0&a=
Inflation-CPI (%) IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=55&pr1.y=6&c=111&s=PCPI%2CPCPIPCH%2CPCPIE%2CPCPIEPCH&grp=0&a
Population Growth (% Change)OECD Country Statistical Profiles: United States 2011-2012http://www.oecd-ilibrary.org/docserver/download/191100301e1t003.pdf?expires=1366146923&id=id&accname=freeContent&checksum=04D8694C429E3C8B184326A806555D8B
Gross Domestic Investment/GDP (%)IMF Article IV Reports 2010, 2011, 2012http://www.imf.org/external/pubs/ft/scr/2010/cr10249.pdfhttp://www.imf.org/external/pubs/ft/scr/2011/cr11201.pdfhttp://www.imf.org/external/pubs/ft/scr/2012/cr12213.pdf
Gross Domestic Savings/GDP (%)OECD Economic Outlook, Volume 2012 Issue 2, Statistical Annex, Table 24http://www.oecd.org/eco/economicoutlookanalysisandforecasts/economicoutlookannextables.htm
General Government (GG) Debt/GDP (%)General Government Revenue/GDP (%)General Government Expenditure/GDP (%)IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=70&pr1.y=7&c=111&s=GGR_NGDP%2CGGX_NGDP%2CGGXWDG_NGDP%2CBCA_NGDPD&grp=0&a=
General Government Financial Balance/GDP (%)OECD Economic Outlook, Volume 2012 Issue 2, Statistical Annex, Table 27http://www.oecd.org/eco/economicoutlookanalysisandforecasts/economicoutlookannextables.htm
Primary Balance/GDP (%)OECD Economic Outlook, Volume 2012 Issue 2, Statistical Annex, Table 30http://www.oecd.org/eco/economicoutlookanalysisandforecasts/economicoutlookannextables.htm
GG Debt/GG Revenue (%)IMF World Economic Outlook Database, October 2012http://www.imf.org/external/pubs/ft/weo/2012/02/weodata/weorept.aspx?sy=2008&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&pr1.x=70&pr1.y=7&c=111&s=GGR_NGDP%2CGGX_NGDP%2CGGXWDG_NGDP%2CBCA_NGDPD&grp=0&a
GG Interest/GG Revenue (%)OECD.StatExtracts: Government deficit/surplus, revenue, expenditure and main aggregateshttp://stats.oecd.org/
Domestic Credit (% Change)Principal Global Indicators: Domestic Credithttp://www.principalglobalindicators.org/default.aspx
Domestic Credit/GDP (%)World Bank World Development Indicators 2012http://databank.worldbank.org/ddp/html-jsp/QuickViewReport.jsp?RowAxis=WDI_Ctry~&ColAxis=WDI_Time~&PageAxis=WDI_Series~&PageAxisCaption=Series~&RowAxisCaption=Country~&ColAxisCaption=Time~&NEW_REPORT_SCALE=1&NEW_REPORT_PRECISION=0&newReport=yes&IS_REPORT_IN_REFRESH_MODE=true&IS_CODE_REQUIRED=0&COMMA_SEP=true
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I. POLITICAL, ECONOMIC AND SOCIAL STABILITY – FACTORS FOR FUTURE GROWTH AND FINANCIAL RELIABILITY
Political and Institutional Stability
1. Rule of LawTo what extent do government and administration act on the basis of and in accordance with legal provisions or culturally accepted norms to provide legal or practical certainty?
Government and administration act
predictably, on the basis of and in
accordance with legal provisions. Legal
regulations are consistent and transparent,
ensuring legal certainty.
Government and administration rarely
make unpredictable decisions. Legal
regulations are consistent, but leave
a large scope of discretion to the
government or administration.
Government and administration
sometimes make unpredictable decisions
that go beyond given legal bases or do
not conform to existing legal regulations.
Some legal regulations are inconsistent
and contradictory.
Government and administration often
make unpredictable decisions that
lack a legal basis or ignore existing
legal regulations. Legal regulations
are inconsistent, full of loopholes and
contradict each other.
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COUNTRY REPORT FOR THE UNITED STATESby Michael Mandelbaum, Christian A. Herter Professor and Director of American Foreign Policy at The Johns Hopkins School of Advanced International Studies
The rule of law is firmly embedded in American society,
politics and economic life. The courts at all levels—
local, state, and national—function effectively, although
this effectiveness varies across jurisdictions, and their
verdicts are respected and obeyed. A vivid illustration of
the broad and deep acceptance of the rule of law and the
legitimacy of courts was the U.S. Supreme Court’s 2000
decision, in the case of Bush v. Gore, that decided the
presidential election of that year in favor of the Republican
candidate, George W. Bush. Although the court’s action
was unprecedented and the legal reasoning underlying it
the subject of widespread criticism, there was no hint of a
serious challenge to the decision by the losing side. While
judges in some states and localities are elected rather than
appointed, this has not thus far compromised the rule of
law in the United States by politicizing the judiciary, as it
has in other countries. The strength of the rule of law has
made an important contribution to American economic
growth since the 19th century, making it possible to do
business across a large continent among parties who do
not know each other. This feature of American life has
helped make the country, from the 19th century to
the present, an attractive destination for investment
from abroad.
INCRA USA Ratings Report
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To what extent do independent courts control whether government and administration act in conformity with the law?
Courts in the United States have the power to monitor
government actions and overturn them if they are found
to be in violation of basic—that is, constitutional—
doctrines. This power was affirmed early in the country’s
history by the Supreme Court’s 1803 decision in Marbury
v. Madison, which established what came to be known
as the power of judicial review. This power operates
at the state level as well. The legal sector of American
society is fully independent and well developed, with
an elaborate system of legal training centered on law
schools that students attend for three years after receiving
undergraduate degrees, and with provisions for continuing
legal education provided by local professional groups of
lawyers known as bar associations. While the prestige
of lawyers has fallen in recent decades, the standing of
judges and courts remains high.
Independent courts effectively review
executive action and ensure that the
government and administration act in
conformity with the law.
Independent courts usually manage to
control whether the government and
administration act in conformity with
the law.
Courts are independent, but often fail to
ensure legal compliance.
Courts are biased for or against
the incumbent government and lack
effective control.
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To what extent is there a working separation of powers (checks and balances)?
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The separation of powers is perhaps more fully
established, and has a longer history, in the United States
than in any other country. It is a fundamental principle of
the nation’s federal Constitution, which went into effect
in 1789 and stipulates a division of power among the
executive branch, headed by the president, the legislative
branch, which consists of the House of Representatives
and the Senate, and the judiciary. This pattern is generally
repeated in state and local governments.
It is not uncommon in the American system for power to
be divided between the two major political parties, the
Republicans and the Democrats, with one controlling
the executive branch and the other the legislative (for
example, for much of the 1970s and 1980s the Republicans
held the presidency while the Democrats controlled both
houses of the legislative branch) or with one controlling
one chamber of the legislative branch and the other the
other chamber (in 2013, the Democrats control the Senate
and the Republicans the House of Representatives). These
patterns are often found in state government as well. Such
divisions did not, in the past, paralyze the working of the
government. Indeed, some studies have suggested that
“divided government” of this kind can actually be more
productive in passing legislation than when power is
consolidated in the hands of a single party.
The actual balance of effective power between the
executive and legislative branches has shifted over time.
The executive became relatively more powerful from
the 19th century to the 20th with the expansion of the
functions of government, almost all of which the executive
branch supervises. In particular, at the national level the
executive branch tends to dominate the conduct of foreign
policy. Nonetheless, the legislative branch remains robust
at all levels of government, and the judiciary retains its
independence in its more limited sphere of enforcing and
interpreting rather than creating and administering the
law.
In recent years the separation of powers that is basic
to the American system of government has come under
criticism for providing, in effect, too much of a good thing:
fragmenting power in a way that makes it difficult for the
government to act decisively. It has come to be seen in
some quarters not so much as what its designers intended
it to be—a check against despotism—than as a formula
for gridlock in the conduct of the public’s business.
There is a clear separation of powers with
mutual checks and balances.
The separation of powers generally
is in place and functioning. Partial or
temporary restrictions of checks and
balances occur, but a restoration of
balance is sought.
One branch, generally the executive,
has an ongoing and either informally or
formally confirmed monopoly on power,
which may include the colonization
of other powers, even though they are
institutionally differentiated.
There is no separation of powers, neither
de jure nor de facto.
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To what extent do government authorities ensure well-defined property rights and regulate the acquisition, benefits, use, and sale of property?
Property rights and regulations on
acquisition, benefits, use, and sale are
well defined and enforced. Property rights
are limited, solely and rarely, by overriding
rights of constitutionally defined public
interest.
Property rights and regulations on
acquisition, benefits, use, and sale are
well defined, but occasionally there are
problems with implementation and
enforcement under the rule of law.
Property rights and regulations on
acquisition, benefits, use, and sale are
defined formally in law, but they are not
implemented and enforced consistently
nor safeguarded adequately by law against
arbitrary state intervention or illegal
infringements.
Property rights and regulations on
acquisition, benefits, use, and sale are
not defined in law. Private property is not
protected.
Following the British tradition that the United States
inherited, property rights have been well established
and effectively protected from the country’s beginnings.
Americans typically have more extensive personal
holdings of two important forms of property—equities and
real estate—than the citizens of other advanced industrial
democracies. There is nothing comparable in American
history to the expropriation and nationalization of private
firms, and indeed entire industries, that has occasionally
taken place in Europe.
A few recent episodes have caused concern about the
solidity of property rights. The Supreme Court’s decision in
Kelo v. New London, which upheld the right of a municipal
government to transfer land from one private owner to
another for the purpose of economic development, drew
opposition on the grounds that it excessively expanded
the government’s power over private property. The federal
government’s rescue of the automaker General Motors
during the financial crisis of 2008–2009 attracted
criticism for imposing losses on, and thus not adequately
protecting the interests and therefore the property rights
of, people holding the company’s bonds. In general,
however, and especially in contrast to its status in other
countries, the right to property in the United States
remains firmly established.
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2. Transparency / AccountabilityCorruption prevention: To what extent are public officials prevented from abusing their position for private interests?
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The United States probably has less overt corruption
today than at any time in its history. Major scandals
involving bribery at the federal level occurred in the
1870s and the 1920s, and as recently as 1973 a sitting
vice president, Spiro T. Agnew, was forced to resign from
the office because of illegal payments he had received
in his previous position as governor of Maryland. Most
corruption has taken place at the local level, often in
big cities, many of them in the northeastern part of the
country. While corruption has certainly not disappeared,
it is not a major feature of American political life. In 2011,
Transparency International ranked the United States the
25th least corrupt country out of 189.
Of greater concern is the legal use of money in politics
and governance, through lobbying for private economic
interests and donations to defray the expenses of political
campaigning. The sums involved in both have increased
substantially in recent decades. In 1974, for example,
the amount of money spent on all campaigns for the
House of Representatives and the Senate came to $75
million. In 2010, the figure was $879 million. In 1976,
the major-party presidential candidates spent, together,
about $300 million. In 2008, they spent $2.8 billion.
Campaigns have become increasingly expensive, among
other reasons, because of the soaring costs of purchasing
time on television for airing political commercials. Some
observers of American politics fear, and others firmly
believe, that monied interests are increasingly able to
influence—and distort—public policy through lobbying
and campaign contributions. Legislative efforts to limit
campaign contributions have been set back by Supreme
Court rulings, notably in the 2010 case Citizens United
v. Federal Elections Commission, that some types of limits
violate constitutionally protected rights.
Another potential source of improper influence, the
hiring of former government officials by private firms with
economic interests affected by agencies or departments
where the officials formerly worked, is regulated by statute.
However, the prohibitions are weak and the “revolving
door” between government departments and parts of the
private sector over which they have substantial power
certainly has not come to an end.
Legal, political, and public integrity
mechanisms effectively prevent public
officeholders from abusing their positions.
Most integrity mechanisms function
effectively and provide disincentives for
public officeholders willing to abuse their
positions.
Some integrity mechanisms function,
but do not effectively prevent public
officeholders from abusing their positions.
Public officeholders can exploit their
offices for private gain as they see fit
without fear of legal consequences or
adverse publicity.
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To what extent are the media independent from government?
Public and private media are independent
from government influence; their
independence is institutionally protected
and respected by the incumbent
government.
The incumbent government largely respects
the independence of media, but the
regulation of public and/or private media
does not provide sufficient protection
against potential government influence.
The incumbent government seeks to
ensure its political objectives indirectly
by influencing the personnel policies,
organizational framework, or financial
resources of public media, and/or the
licensing regime/market access for private
media.
Major media outlets are frequently
influenced by the incumbent government
promoting its partisan political objectives.
To ensure pro-government media reporting,
governmental actors exert direct political
pressure and violate existing rules of media
regulation.
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The very first amendment to the U.S. Constitution,
adopted at its ratification, guarantees stalwart protection
of freedom of the press. The press’s independence has
been reaffirmed by a number of important court cases,
notably the 1971 decision in the Pentagon Papers case,
which vindicated the right of two major newspapers, The
New York Times and The Washington Post, to publish
government documents involving national security that
they were not authorized to have.
The media in the United States are almost entirely
privately owned; the country has never had a government-
sponsored broadcasting outlet remotely as important
as, for example, Britain’s BBC. And the new technologies
of electronic communication have, mainly through the
Internet, multiplied the already numerous American media
outlets.
One possible adverse consequence of the digital
revolution in the American mass media is the weakening
of previously large, profitable, and powerful print outlets
such as The Times and The Post, to the point that they lack
the resources to conduct the kinds of investigations into
governmental malfeasance that have in the past served
as a check on corruption. Another adverse consequence,
already being felt in the view of some, is the aggravation
of the polarization of American politics as digital outlets
cater to and reinforce strongly partisan political views.
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To what extent does the government enable the participation of civil society in the political process?
Civil society—that is, nongovernmental groups of
all kinds—is as strong in the United States as in any
country in the world. The same first amendment to the
Constitution that assures a free press also guarantees
freedom of association, and thus enshrines the role of
civil society in the highest law of the land. The prominence
of nongovernmental groups was noted by the Frenchman
Alexis de Tocqueville in his influential 19th-century book
about American society, Democracy in America, first published
in two volumes in 1835 and 1840. Their importance
persists, although by some accounts—notably the 2000
book “Bowling Alone” by Robert Putnam—they have come
to play a less active role in American society recently
than they did in the past. In general, however, on virtually
every issue from tax and trade policy to environmental
regulations to the organization of the system of education
to foreign policy, elements of civil society pervade the
policymaking process. The government could not cut off
their influence if it tried; if it did try it would be violating the
Constitution; and it does not try. Indeed, it has sometimes
been suggested that the strength of civil society in the
United States, and the close involvement of its many
component parts in policymaking, are handicaps because
the groups are so numerous and so active politically that
they render the process of making and carrying out policy
less orderly and predictable than is optimal.
The political leadership actively enables
civil society participation. It assigns an
important role to civil society actors in
deliberating and determining policies.
The political leadership permits civil
society participation. It takes into account
and accommodates the interests of most
civil society actors.
The political leadership neglects civil
society participation. It frequently ignores
civil society actors and formulates its
policy autonomously.
The political leadership obstructs civil
society participation. It suppresses civil
society organizations and excludes their
representatives from the policy process.
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3. Social CohesionTo what extent is exclusion and decoupling from society effectively prevented?
Americans of African descent have had a special status:
Their ancestors were brought forcibly to the country as
slaves. Even after the slaves were emancipated at the end
of the Civil War, the southern U.S. states had an official
policy of racial segregation, depriving African-Americans
of full political rights and of the social and economic
opportunities available to other citizens. Since the late
1960s government and social institutions have made a
concerted effort to cope with the adverse consequences
of that inheritance, largely through measures intended
to broaden opportunity. The effort has had achieved
some notable successes. African-Americans are more
fully integrated into American society than was the case
before legal segregation was abolished and the official
efforts at inclusion began. A large and growing African-
American middle class now exists. On the other hand, on
many measures of well-being—income, total wealth, and
life expectancy, for example—African-Americans continue
to lag behind the rest of the country. Efforts at inclusion
since the 1960s have extended to other groups as well,
particularly people of Hispanic background, who also
tend to lag behind the majority on these indices, and to
women—who are, in fact, a slight majority rather than a
minority of the American population.
America’s Gini coefficient—a measure of inequality—is
41st out of 136 countries in the world, but it is higher than
that of any Western European country, and the trend is
toward even greater inequality. Between 2002 and 2007,
people in the top 1 percent of the American income ladder
captured two-thirds of the total gains from economic
growth, and the top one-tenth of 1 percent captured
fully one-third of the gains. The U.S. government has
taken steps designed to reduce inequality, most notably
a progressively structured federal income tax code and
the Earned Income Tax Credit, which benefits poorer
taxpayers, but these have not arrested or reversed the
ongoing trend.
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Policies very effectively enable societal
inclusion and ensure equal opportunities.
For the most part, policies enable societal
inclusion effectively and ensure equal
opportunities.
For the most part, policies fail to prevent
societal exclusion effectively and to ensure
equal opportunities.
Policies exacerbate unequal opportunities
and exclusion from society.
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Socioeconomic Criteria – Preconditions for Social Stability and Future Growth
With 15.1 percent of its population living below the
poverty line, the United States has a higher incidence of
poverty than most other similar countries. This relatively
high rate of poverty has several causes. They include
a somewhat less generous welfare state than in other
advanced industrial democracies, arising in part from the
belief that the availability of economic opportunity is more
important than economic equality, and a historically more
heterogeneous population than in comparable countries.
This heterogeneity stems from the fact that America has
been, since its inception, a nation of immigrants; and those
immigrants have come from different parts of the world:
first primarily from northern Europe, then, at the end of
the 19th century, from southern and eastern Europe, and
in the second half of the 20th century increasingly from
Latin America and Asia. Historically, the United States has
relied on the institutions of civil society, and particularly
on the private economy and the public school system,
rather than on the government, to absorb and assimilate
its immigrants.
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How strong is the citizens’ approval of political institutions and procedures?Please base your assessment on public opinion survey
data, addressing the following factors:
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Citizens’ assessment of politics and government in the
United States presents a mixed picture. On the one hand,
the overall political system commands wide and deep
support. The Constitution is the subject of respect, rising
in some cases almost to reverence, among Americans.
Democracy is widely regarded as without question the
most desirable form of government. The term “regime
change” is virtually never applied by Americans to their
own country.
On the other hand, the main political institutions,
especially the U.S. Congress, have shockingly low
approval ratings. In one recent survey, only 14 percent
of the respondents approved of the performance of
Congress. President Obama earned a higher score, just
over 50 percent, but presidential approval ratings have
occasionally fallen to the low thirties in recent decades.
Congress’s low approval ratings present a paradox. Since
the public elects its members, the low esteem in which
the institution is held would seem logically to produce a
rapid rate of turnover in its membership. Yet incumbents
are routinely reelected. Americans dislike the institution
of Congress but often approve of their own individual
representative to it.
Another sign of dissatisfaction with the political system
as it currently operates, as distinct from its basic design,
is the growing number of Americans who do not identify
with either of the two major political parties but instead
consider themselves political independents. According to
a survey taken at the end of 2012, fully 38 percent of the
electorate considered themselves independents, with 33
percent identifying as Democrats and only 23.9 percent
as Republicans.
Approval of political institutions and
procedures is very high.
Approval of political institutions and
procedures is fairly high.
Approval of political institutions and
procedures is fairly low.
Approval of political institutions and
procedures is very low.
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The 20th-century American humorist Will Rogers once
said that “the trouble with the House of Representatives
is that it is so damned representative.” Social interests
of every kind are well represented in the American system
at the national, state and local levels. Three concerns
about their role and their impact have arisen in recent
years. One is that on economic issues, business interests
have increased their ability to influence legislation at
the expense of consumers, who tend to be far less well
organized, and labor, whose union organizations represent
a steadily dwindling fraction of American workers. This
is perhaps one reason that corporate profits currently
constitute the highest proportion of U.S. GDP, and wages
the lowest, since the 1930s. (To complicate this issue, an
increasing proportion of organized workers are employed
by the government rather than the private sector, and their
gains in benefits, often imposing financial obligations
on the states and municipalities that employ them, can
lead to higher taxes or bigger deficits or both.) The second
concern is that societal interests can offset one another in
such a way as to paralyze the policymaking process, to the
detriment of the wider society. The third concern is that
cooperative associations are retarding economic growth.
The economist Mancur Olson identified the tendency,
which is particularly pronounced in democracies, to form
what he called “distributional coalitions”—interest groups
that use their political power to divert society’s resources
to themselves at the expense of the general well-being.
This process, in the view of some observers, is harming the
economic performance of the United States.
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To what extent is there a network of cooperative associations to mediate between society and the political system?
There is a broad range of interest groups
that reflect competing societal interests,
tend to balance one another, and are
cooperative.
There is an average range of interest
groups, which reflect most societal
interests. However, a few strong interests
dominate, producing a latent risk of
pooling conflicts.
There is a narrow range of interest
groups, in which important societal
interests are underrepresented. Only a few
players dominate, and there is a risk of
polarization.
Interest groups are present only in
isolated social segments, are on the whole
poorly balanced and cooperate little. A
large number of societal interests remain
unrepresented.
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To what extent is the government able to moderate domestic economic, political, and social conflicts?
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Historically the American government has done well
at moderating social conflict—with the monumental
exception of the country’s Civil War from 1861 to 1865. Since
then the two-party system, with its capacity for absorbing
and representing new forces and new ideas,; the habits of
democracy, which include cooperation and compromise,
and the country’s underlying consensus about basic
political values, have kept the conflicts inevitable in any
society, especially one as large, diverse and dynamic as
that of the United States, within reasonable bounds.
In recent years, however, the political system has become
more sharply polarized. The two major parties are now
farther apart ideologically, according to studies by
political scientists, than at any time in a hundred years
and perhaps since the 1850s—the contentious decade
that led to the Civil War. For this there are several reasons:
the increasing ideological homogeneity of the two parties,
with northern liberals having left the Republican ranks
while southern conservatives abandoned the Democrats;
the rise of social issues such as abortion and gay rights,
which, unlike economic issues, do not lend themselves
to compromise; and the computer-aided construction
of legislative districts, known as gerrymandering, to
guarantee the election of a candidate from one of the two
parties. In such districts, the primary election to choose
the parties’ candidates is the decisive contest—and one in
which, because only party activists tend to participate, the
candidate with the most extreme views stands the greatest
chance of winning. There is some evidence, notably in
the work of the political scientist Morris Fiorina, that the
electorate as a whole is not as sharply polarized as are
the two parties, which means that the political system
does not fully represent the country as a whole. But the
present state of the parties makes compromise on major
initiatives to address pressing problems, above all the
deficit and the reform of immigration laws, very difficult.
Another major conflict looms on the horizon: one between
generations. As the American population ages, the cost
of the major social support programs for retired people—
Social Security and Medicare—will increase sharply.
Meanwhile, the ratio of active workers, who will have to
pay more and more for these programs, to retirees, who
are the beneficiaries, will decline. In these circumstances,
with the economic interests of the two groups increasingly
at odds, the generations may well come into sharp
political conflict. The way to avoid or mitigate such a
conflict is to reform the programs to make them less costly,
but the polarization of the political system has thus far
prevented this.
The government depolarizes conflicts and
expands consensus across the dividing
lines.
The government prevents conflicts from
escalating.
The government does not prevent conflicts
from escalating.
The government exacerbates existing
conflicts for populist or separatist
purposes.
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4. Future ResourcesTo what extent does education policy deliver high-quality, efficient, and equitable education and training?
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The quality of the American system of education varies
dramatically. Post-secondary education is by most
accounts the best in the world, but at the primary and
secondary levels the United States delivers education that
is by global standards mediocre. Higher education is a
great American success story. Of the 20 best universities
in the world according to a survey by the Times of
London’s Higher Education Supplement, 15 are located in
the United States. (Four others are in Britain.) The best
students from all over the world aspire to do postgraduate
studies in these American institutions, especially in
the sciences, mathematics and engineering. Even here,
however, the picture is not entirely rosy. Many of the
best postgraduate students come from abroad, but U.S.
immigration laws make it increasingly difficult for them
to stay in the country and contribute to society and the
economy, as so many immigrants have done in the past.
And the nation’s political polarization has blocked reform
of the immigration laws to correct this. Moreover, rising
costs make access to higher education, which Americans
want to be universal, increasingly difficult. Students have
to take on increasingly heavy burdens of debt to attend
these institutions, which discourages attendance and
imposes hardship afterwards. And the percentage of the
population actually completing a post-secondary degree,
once the highest in the world, has fallen in recent years to
the point that America now ranks only 12th in the world on
this dimension of educational achievement.
U.S. primary and secondary schools fare less well in
international comparisons. In the 2008 Program for
International Student Assessment (PISA) tests of students
from many countries, American scores in science and
technology were at about the OECD average, and in
mathematics were below the average. In no discipline
did the United States excel. Since the 1970s, per-pupil
expenditure in the United States has more or less doubled
in real terms without producing better-educated students
as defined by scores on standardized tests. More than a
quarter of American students fail to complete high school.
The reform of primary and secondary education is widely
recognized as a major need, and a number of efforts are
under way: upgrading the performance of teachers for
one, and broadening the choices available to students
beyond publicly supported schools for another. Both are
controversial, however; neither is being implemented
on a national scale, and neither has thus far produced
dramatic improvement where it has been undertaken. The
need for such improvement is key because in the future,
even more than in the past, educational attainment will
be a predictor of income and lifetime earnings. Those
without academic credentials will lag behind the rest of
society. If the United States cannot upgrade its primary
and secondary education, the country’s degree of income
inequality will continue to increase.
Education policy effectively delivers high-
quality, efficient, and equitable education
and training.
Education policy largely delivers high-
quality, efficient, and equitable education
and training.
Education policy partly delivers high-
quality, efficient, and equitable education
and training.
Education policy largely fails to deliver
high-quality, efficient, and equitable
education and training.
10
9
8
7
6
5
4
3
2
1
UN
ITE
D S
TA
TE
S O
F A
ME
RIC
A
3 3
UN
ITE
D S
TA
TE
S O
F A
ME
RIC
A
The United States does well—probably better than any
other country—at generating innovations and translating
them into new and commercially valuable products and
processes. This has been true from the founding of the
republic. From its earliest days, America was a nation
of tinkerers, innovators, and entrepreneurs. In the 20th
century, its universities and many private companies
became sources of ideas and technologies, with students
and others translating the fruits of university-based
research into commercially viable products and services.
Military-related research and the nation’s space program
also contributed in this way. A community of U.S. venture
capitalists provides money for new enterprises, and the
country’s bankruptcy laws and its comparatively greater
tolerance for business failures than in other countries
encourage people to take the risks involved in launching
new ventures. The outstanding product, and example, of
this “ecology of innovation” is Silicon Valley in northern
California. Even in this area of great strength for the
United States, however, there are worrying signs. Major
high-tech firms, for example, are moving research and
development facilities out of the United States. The
American share of total global patents is falling. Federal
funding for basic research, an integral part of the process
of innovation, is likely to decline in the years ahead. Still,
on balance, and in comparison with others, the country
scores very high here.
To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products and services?
3 3
US
FLI CO
DE
BO
OK
Research and innovation policy effectively
supports innovations that foster the
creation of new products and services and
enhance productivity.
Research and innovation policy largely
supports innovations that foster the
creation of new products and services and
enhance productivity.
Research and innovation policy partly
supports innovations that foster the
creation of new products and services and
enhance productivity.
Research and innovation policy largely
fails to support innovations that foster the
creation of new products and services and
enhance productivity.
10
9
8
7
6
5
4
3
2
1
INCRA USA Ratings Report
3 4
How successful is a government in reducing unemployment and in increasing employment?
3 4
Historically the United States has had a lower
unemployment rate than the countries of Western Europe,
the result of more flexible labor markets that were
themselves the products of fewer regulations and weaker
unions than in Europe. Americans’ greater geographic
mobility also played an important role here: Workers
moved frequently from one part of the country to another
to change jobs. Unemployment has remained higher than
normal in the wake of the recession of 2007–2009, in part
no doubt because of the severity of that downturn but also
very likely for reasons that go beyond it. Even with high
unemployment, by some estimates more than 3 million
jobs were going unfilled for lack of qualified applicants.
Improved training and retraining programs may turn out
to be necessary in the future, as they have not been in the
past, to return to the relatively high levels of employment
that have been historically normal in the United States.
Successful strategies ensure unemployment
is not a serious threat and levels of
employment are high.
Labor market and employment policies have
been more or less successful with regard
to the objective of reducing unemployment
and increasing employment.
Strategies to reducing unemployment and
increasing employment have shown little
effect.
Labor market and employment policies have
been unsuccessful and unemployment has
risen and employment has declined.
10
9
8
7
6
5
4
3
2
1
To what extent are social security schemes based on principles of fiscal sustainability?
3 5
US
FLI CO
DE
BO
OK
America’s major programs in this area—Social Security
and Medicare—which are known as entitlements because
each is available by right to all Americans age 65 or older,
are not sustainable over the long term under current
conditions. The retirement of the country’s largest-ever
age cohort, the 78 million “baby boomers” born between
1946 and 1964, will vastly increase the amount of money
needed to fulfill the terms of these programs. This will
create economically ruinous and politically untenable
obligations. By one estimate, the entitlement programs’
share of consumption of U.S. GDP, which is now about
10 percent, will rise to more than 18 percent by 2050. By
another rough estimate, the difference between the total
cost of paying for the boomers’ retirement over several
decades under the current rules and the amount of money
the government can expect to collect for this purpose at
present rates is no less than $52 trillion. The most potent
driver of cost increases will be Medicare, and because
Medicare is such a large and rapidly growing program, the
problem of paying for U.S. entitlement programs is closely
related to another one: the high cost of medical care of
all kinds. The United States spends about 18 percent
of its GDP on health care, which is one-and-one half
times to twice as much as the other advanced industrial
democracies. France, for example, spends only 12 percent
of its GDP for this purpose, but the French population as a
whole is no less healthy than the American one.
The solvency of the nation’s entitlement programs, and in
some measure of the country as a whole, therefore requires
finding ways of controlling health care costs. There is no
national consensus on how this should, or even can, be
done. The Affordable Care Act of 2010, commonly known
as Obamacare, includes provisions for cost reduction,
but their effectiveness will not be tested until later this
decade, when the law has been in effect for several years.
As their costs rise, and even if the growth of health care
costs in general can be restrained, both Social Security
and Medicare will have to be reformed to keep them
economically and politically viable. While it is widely
accepted among those who study these programs that
changes will be needed in both benefits and costs to
bring them under control, little progress has been made
in devising and implementing such changes. The idea of
entitlement reform is a highly contentious and politically
divisive matter. The country has begun to debate it but
is not, as of this writing, close to an agreement on the
appropriate steps to be taken.
Social security schemes are fiscally
sustainable.
Social security systems meet most standards
of fiscal sustainability.
Social security schemes meet only some
standards of fiscal sustainability.
Social security schemes are fiscally
unsustainable.
10
98
7
65
4
32
1
INCRA USA Ratings Report
3 6
To what extent are environmental concerns effectively taken into account in both macro- and microeconomic terms?
3 6
The United States has had an active and effective
environmental movement since the 1960s, which helped
to establish the Environmental Protection Agency (EPA)
in 1970. That agency has grown in power and reach;
likewise, state and even local governments have their own
environmental laws and agencies to enforce them. As a
result, over the four decades since the establishment of
the EPA, what might be called “local pollution” in the
United States—the smog in urban areas, for example, and
the pollution in rivers—has abated considerably.
To deal with the most important environmental problem
of global scope, however—global warming—the United
States has adopted few formal measures. A substantial
fraction of the American public, and part of the country’s
political establishment, simply does not believe that
the planet’s temperature is rising with unusual rapidity,
or that, if it is, this will cause severe environmental,
economic, social and political damage if unchecked.
The United States did not ratify the 1997 Kyoto Protocol,
the international treaty aimed at reducing emissions to
combat climate change. Complicated legislation called
the American Clean Energy and Security Act, designed
to reduce the country’s use of carbon-based fuels, was
approved by the House of Representatives in 2009 but
did not pass in the Senate. Once a leader in research and
development of renewable fuels, the United States now
trails behind other countries. It does have a number of
government initiatives designed to achieve that goal,
such as programs that encourage the use of ethanol or
subsidies for solar power and manufacturers of electric
automobiles. These programs have attracted criticism
and political opposition and have done little to reduce
American, let alone global, dependence on global-
warming-producing fossil fuels. Improvement in energy
efficiency in industrial and consumer activity over the
past several decades has reduced the amount of carbon-
based fuel usage per unit of economic output—but
because overall national output has grown, so have total
U.S. carbon emissions. Because of widespread skepticism
about the very existence of man-made climate change,
as well as because of the historically deeply rooted
resistance to taxation of all kinds (which is a sentiment far
stronger in the United States than in Europe) the United
States has not even seriously considered the measure that
would most efficiently increase innovation, production,
and consumption of non-fossil fuels: a tax on carbon.
Environmental concerns are effectively taken
into account and are carefully balanced with
growth efforts.Environmental regulation and
incentives are in place and enforced.
Environmental concerns are effectively
taken into account but are occasionally
subordinated to growth efforts.
Environmental regulation and incentives are
in place, but their enforcement at times is
deficient.
Environmental concerns receive
only sporadic consideration and are
often subordinated to growth efforts.
Environmental regulation is weak and hardly
enforced.
Environmental concerns receive no
consideration and are entirely subordinated
to growth efforts. There is no environmental
regulation.
10
9
8
7
6
5
4
3
2
1
5. Strategic CapacityPrioritization: To what extent does the government set and maintain strategic priorities?
3 7
US
FLI CO
DE
BO
OK
The U.S. government has ready access to expertise of
all kinds: through government bodies organized for this
purpose, such as the President’s Council of Advisors on
Science and Technology, through expert testimony to
congressional committees, through informal consultation
by the bureaucracy at all levels, and by virtue of the fact that
it is far easier to enter the government laterally—to recruit
expertise from outside the permanent bureaucracy—
in the United States than in other countries. America
has on several occasions demonstrated its capacity for
setting and keeping to strategic priorities. Perhaps the
most notable example is its 45-year policy of containing
the Soviet Union, maintained through nine presidential
administrations, four Democratic and five Republican.
Still, consistency in the pursuit of major goals does face
several obstacles in the United States. One is the division
of power between the executive and legislative branches,
which can and do embrace different goals and check each
other in pursuit of them. Another is the fact that all of the
members of one chamber of the federal legislative branch,
the House of Representatives, must stand for election
every two years, a shorter term of office than is found in
any other advanced industrial society, which makes them
subject to short-term pressures and incentives. A third is
the unusually sharp polarization, in the second decade of
the 21st century, between the two major political parties,
making it difficult to find broad goals that both will
support. A fourth is the fact that, in contrast to Europe,
planning is not a highly regarded governmental activity
in the United States. While most Western European
governments have, or have had since 1945, official bodies
to engage in indicative planning (not to be confused with
the comprehensive and mandatory planning of communist
economic systems), the United States does not.
II. STEERING CAPABILITY AND REFORM CAPACITIES
The government sets strategic priorities
and maintains them over extended periods
of time. It has the capacity to prioritize and
organize its policy measures accordingly.
The government sets strategic priorities,
but sometimes postpones them in favor
of short-term political benefits. It shows
deficits in prioritizing and organizing its
policy measures accordingly.
The government claims to be setting
strategic priorities, but replaces them
regularly with short-term interests of
political bargaining and office seeking.
Policy measures are rarely prioritized and
organized.
The government does not set strategic
priorities. It relies on ad hoc measures,
lacks guiding concepts, and reaps the
maximum short- term political benefit.
10
9
8
7
6
5
4
3
2
1
INCRA USA Ratings Report
Policy coordination: To what extent can the government coordinate conflicting objectives into a coherent policy?
3 8
The size of and division of power within the American
government presents a challenge to policy coordination.
Over the past half century, power within the executive
branch has gravitated away from the various departments
and agencies and to the White House, although the
business of government is so extensive and complex
that departments retain considerable independence,
especially on matters that are not highly political visible.
Within the White House, both formal bodies, such as
the National Security Council, and ad hoc arrangements
have been created for the purpose of coordination.
Still, the sheer scope of the government—as well as the
power of Congress, which the White House emphatically
does not control even when members of the president’s
party are in the majority in both houses and which has
important powers of its own (notably the power of the
purse)—limit the degree of coherence that the making and
implementation of policy can achieve in the United States.
The government coordinates conflicting
objectives effectively and acts in a
coherent manner.
The government tries to coordinate
conflicting objectives, but with limited
success. Friction, redundancies, and gaps
in task assignments are significant.
The government mostly fails to coordinate
between conflicting objectives. Different
parts of the government tend to compete
among each other, and some policies
have counterproductive effects on other
policies.
The government fails to coordinate
between conflicting objectives. Its policies
thwart and damage each other. The
executive is fragmented into rival fiefdoms
that counteract each other.
10
9
8
7
6
5
4
3
2
1
3 9
US
FLI CO
DE
BO
OK
Stakeholder Involvement: To what extent does the government consult with major economic and social interest groups to support its policy?
Both the executive and especially the legislative branches
consult extensively with major social and economic
groups. Because of the historical strength of civil society
in the United States and because economic, social and
political interests are well organized, the government very
seldom takes an initiative involving domestic matters
without extensive consultation. The 2010 health care
law is an example; the Obama administration conferred
with all organized parties with a stake in the legislation.
Of course, not all groups are equally well organized, and
the growing prominence of money in campaigning and
governing may give wealthy groups increasing influence,
tilting the political playing field in their favor. (It is also
possible, however, that technology will tend to equalize
political influence by providing groups lacking money
with new channels of influence.) The common criticism
of government is not that it fails to consult adequately
with those affected by the policies it enacts, but rather the
reverse: that consultations can become so elaborate and
prolonged that they prevent effective action.
The government successfully motivates
economic and social actors to support its
policy.
The government facilitates the acceptance
of its policy among economic and social
actors.
The government consults with economic
and social actors.
The government hardly consults with any
economic and social actors.
10
9
8
7
6
5
4
3
2
1
INCRA USA Ratings Report
Political Communication: To what extent does the government actively and coherently communicate and justify the rationale for and goals of its policies to the public?
4 0
The United States is so large, and there are so many
channels of communication and so many different and
often conflicting views on public policy, that effective
communication is not always easy. It is the president,
at the national level, and to a lesser extent governors
and mayors at the state and local levels, who have the
strongest and most widely heeded voices. Since the early
20th century, the president has been the focus of media
attention in the nation’s capital, and is usually taken by
foreign audiences (and often by Americans as well) to
speak for the country as a whole. The president occupies
what has come to be known as the “bully pulpit,” from
which his words and ideas can reach all Americans and
others beyond the country’s borders. He has by tradition
at least one opportunity annually, in his State of the Union
address to Congress, to command the country’s undivided
attention and occasionally makes other special national
addresses, especially during emergencies. (Governors and
mayors have similar, although less potent, opportunities.)
It gives him the chance to set the national agenda,
although it by no means guarantees the enactment of that
agenda. As in other countries, it should be noted, officials
in the United States conduct their bureaucratic battles by
means of leaks to the press, so the executive branch, even
under the tightest presidentially imposed discipline, does
not always speak with a single voice.
The government effectively coordinates its
communication efforts and it coherently
communicates and justifies the goals of its
policies to the public.
The government seeks to coordinate its
communication efforts. Contradictory
statements are rare, but do occur
sometimes. In most cases, the government
is able to coherently communicate and
justify the goals of its policy to the public.
The government has problems in
effectively coordinating its communication
efforts. Statements occasionally contradict
each other. The government is only partly
able to coherently communicate and
justify the goals of its policies to the
public.
The government fails to coordinate its
communication efforts. Statements often
contradict each other. The government
is not able to coherently communicate
and justify the goals of its policies to the
public.
10
9
8
7
6
5
4
3
2
1
6. Implementation and EfficiencyTo what extent can the government achieve its own policy objectives?
4 1
US
FLI CO
DE
BO
OK
Because power is divided in the American system, different
branches and levels of the government can and do have
different objectives. Indeed, this system was originally
designed to make it difficult to put into practice a
comprehensive program of any kind, or at least to prevent
such a thing from being done quickly. Moreover, the
current unusually sharp divisions between the two major
political parties further inhibit effective implementation
of any particular policy agenda. Each party opposes,
blocks and where relevant seeks to cancel or reverse what
the other is attempting to do.
It became customary in the 20th century for the president
to put together a legislative program and announce it in
his annual State of the Union message to Congress at
the beginning of each calendar year. On a few occasions,
most of that program has been enacted into law during the
president’s term of office. But in the political conditions
that prevail in 2013, such an achievement is most unlikely.
The government can largely implement its
own policy objectives.
The government is partly successful in
implementing its policy objectives or can
implement some of its policy objectives.
The government partly fails to implement
its objectives or fails to implement several
policy objectives.
The government largely fails to implement
its policy objectives.
10
9
8
7
6
5
4
3
2
1
INCRA USA Ratings Report
4 2
To what extent does the government make efficient use of available human, financial, and organizational resources?
The quality of the government’s workforce, although
difficult to measure, has probably declined somewhat
in recent decades. Beginning in the 1930s, government
service came to be seen as important and constructive, and
in comparison with the private sector it was reasonably
well-compensated work. In recent decades, each of these
qualities has declined: One reason for the financial crisis
of 2008, for example, was the relatively weak government
oversight of the financial industry, the result not only
of the limits of existing regulations but also of the fact
that someone with an interest in finance could make
so much more money in the private than in the public
sector. Another difficulty, peculiar to the U.S. federal
government, inhibits maximally effective employment of
human resources. Departments and agencies often lack
leadership at the outset of a presidential term, when the
executive branch’s power to make and enact policy tends
to be greatest, because their leaders must be confirmed
in office by the Senate. This confirmation process has
become ever more complicated, protracted, intrusive
and, for the purpose of recruiting talented people to fill
the positions in question, discouraging. To confirm all the
senior appointed officials of the Kennedy administration
in 1961 took 10 weeks; of the Reagan Administration in
1981, 20 weeks; and of the Obama administration in 2009,
18 months.
The government makes efficient use
of all available human, financial, and
organizational resources.
The government makes efficient use of
most available human, financial, and
organizational resources.
The government makes efficient use
of only some of the available human,
financial, and organizational resources.
The government wastes all available
human, financial, and organizational
resources.
10
9
8
7
6
5
4
3
2
1
4 3
US
FLI CO
DE
BO
OK
7. AdaptabilityPolicy Learning: How innovative and flexible is the government?
The United States has experienced policy learning—or at
least significant change in policy—in recent decades. The
wars in Vietnam in the 1960s and 1970s and in Afghanistan
and Iraq in the first decade of the 21st century triggered
political backlashes that led to more cautious foreign
policies. (In Iraq the armed forces themselves engaged in
learning, leading to the change in tactics in 2007 known as
the “surge.”) The inflation of the late 1970s led to a tighter
monetary policy, and contributed to the deregulation and
increased reliance on market forces of the 1980s. A major
reform of the Social Security system was enacted in 1983,
and tax code reform in 1986.
In recent years, however, the government has become
more rigid. Changes of policy widely considered to be
necessary to secure the country’s future have nonetheless
not occurred. Every president since Richard Nixon, for
example, has preached the need, for reasons of national
security as well as economic well-being, to decrease
American reliance on imported oil. Yet the government
has never managed to pass the necessary measures—a
tax on carbon, or oil, or imported oil—that would achieve
The government demonstrates a
pronounced ability for complex learning.
It acts flexibly and replaces failed policies
with innovative ones.
The government demonstrates a general
ability for policy learning, but its
flexibility is limited. Learning processes
inconsistently affect the routines and the
knowledge foundation on which policies
are based.
The government demonstrates little
willingness or ability for policy learning.
Policies are rigidly enforced, and the
routines of policy-making do not enable
innovative approaches.
The government demonstrates no
willingness or ability for policy learning.
10
9
8
7
6
5
4
3
2
1
this goal. (American reliance on oil imports has waxed and
waned, but for reasons largely independent of public policy.)
The same is true of the failure to reform Social Security and
Medicare, as discussed earlier. These situations are not due
to a lack of expertise or the failure to consult outside the
government. Nor can they be explained by the absence of
institutional mechanisms to foster adaptation. Indeed, all
three were on display in the 2010 report of the National
Commission on Fiscal Responsibility and Reform, popularly
known as the Simpson-Bowles Commission after its two
co-chairmen, Alan Simpson, a former Republican senator
and Erskine Bowles, a Democratic former White House
chief of staff. President Obama created the commission to
study and make recommendations on the nation’s fiscal
challenges; it had 18 members, including six Democratic
and six Republican members of Congress. Its mandate
included a provision for a vote on its recommendations in
both houses of Congress should a large enough majority
of the commission endorse them. The commission’s report
was widely praised as both an effective path to addressing
the nation’s fiscal problems and a program with the
potential to attract support from both political parties. It
won the support of a majority of commissioners, but not
a big enough majority to force a congressional vote. The
president did not endorse it, and it became a dead letter.
Here again, the chief obstacle to a needed adaptation in
public policy was the sharp polarization of the American
political system in the second decade of the 21st century,
to the extent that the two parties struggle to agree on any
significant measure.
Public opinion presents another obstacle to the reform
of energy policy and entitlements. Effective adaptation
would in both cases entail short-term economic sacrifice
on the part of the American public. While Democrats and
Republicans disagree on most important matters of public
policy, they have both been reluctant to propose measures
that require sacrifice of any kind, especially sacrifice on the
part of segments of society that they represent and that
support them. They calculate that this would have negative
electoral consequences for them because the American
public will not agree to short-term sacrifice, no matter how
compelling the case for it. The gap between what is needed
and what the public is willing to authorize obstructs policy
adaptation in the United States.
INCRA USA Ratings Report
4 4
Institutional Learning: To what extent does the government improve its strategic capacity by changing the institutional arrangements of governing?
The government improves considerably
its strategic capacity by changing its
institutional arrangements.
The government improves its strategic
capacity by changing its institutional
arrangements.
The government does not improve
its strategic capacity by changing its
institutional arrangements.
The government loses strategic capacity by
changing its institutional arrangements.
10
9
8
7
6
5
4
3
2
1
Since the 1930s, reform of the functions of the U.S.
government has usually come in two varieties. One kind
of reform is an effort to coordinate better the disparate
agencies and departments of the federal government:
examples include the establishment of the National
Security Council in 1947 and the National Economic
Council in 1993, both with their headquarters in the White
House, and the appointment of various “policy czars” with
mandates spanning more than one agency or department.
President George H.W. Bush appointed two such czars,
President Clinton eight, President George W. Bush 33
and President Obama 37. Because the government
is so large, all presidential administrations develop
some mechanisms of coordination, even if they do not
acquire formal status or outlive the administration that
established them. The other kind of reform is the addition
of departments of agencies to reflect new challenges and
the political importance of new constituencies. As the
government has grown since the 1930s, departments and
agencies have multiplied. This assures official attention
to a wide array of social and economic issues. It speaks to
the ever-wider scope of governance in the United States,
in common with other advanced industrial countries.
Occasionally various agencies are consolidated, as with
the Department of Homeland Security, which was formed
in 2002. Whether that growth or those consolidations have
improved the strategic capacity of the government and, if
so, to what extent it has fostered such an improvement,
are matters of debate.
US
FLI CO
DE
BO
OK
4 5
Is there evidence from historical events that the country and society have already mastered economic and political shocks in the past?The United States has had the good fortune not to have
experienced a genuinely regime-threatening crisis since
the middle of the 19th century, when divisions in the
country led to a bloody civil war. During the Cold War,
the government had to navigate several political-military
crises, which derived their urgency from the possibility
that nuclear weapons would be used, conceivably on a
large scale, by the United States and its chief rival the
Soviet Union. The most serious of these arose over the
status of Berlin in 1961 (a previous Berlin crisis, without
the acute peril of nuclear war, had taken place in 1948) and
over the Soviet emplacement of nuclear-capable missiles
in Cuba in 1962. In both cases American policy, led by the
president, produced a resolution of the crisis on terms
favorable to the United States and without war.
In the 1930s the Great Depression administered a political
as well as an economic shock to the United States, as to
other Western countries, but the political system itself
was not in serious danger. The Keynesian economic
policies implemented by the administration of Franklin
D. Roosevelt, beginning in 1933, mitigated the economic
damage during the balance of that decade. World War II,
which began for the United States in late 1941, injected
stimulus on a large scale into the U.S. economy in the
form of military spending.
The United States also coped reasonably well with
the great financial crisis of 2008, which had global
consequences but centered on the American financial
system. The failure of the investment bank Lehman
Brothers on Sept. 15, 2008, triggered the crisis, freezing
the flow of credit and jeopardizing the existence of large
financial institutions, not all of them banks. The federal
government stepped in with emergency measures that
stabilized the financial system. It played, in effect, the
classic governmental role of lender of last resort. Close
cooperation on an ad hoc basis among three major
economic officials—Treasury Secretary Henry Paulson,
Federal Reserve Chairman Ben Bernanke, and the president
of the Fed’s most important regional branch in New York,
Timothy Geithner—was responsible for the generally
successful efforts to cope with the crisis. The process
was not an entirely smooth one. Congress rejected the
first proposal for a Troubled Asset Relief Program (TARP),
passing it only after the initial rejection had triggered a
sharp drop in the stock market. Nor did the U.S. economy
escape serious damage: the financial crisis contributed
substantially to the longest and deepest recession the
country had experienced since the 1930s. Without the
III. TRACK RECORD OF PAST CRISIS MANAGEMENT
effective work of the trio of economic officials, however,
the damage would surely have been worse.
Score: 9
Does the political system facilitate crisis remediation in a timely manner?While the American political system permitted crisis
remediation in the fall of 2008 and thereafter, it did not
facilitate what turned out to be an escape from the worst
possible outcome of the near-meltdown of the financial
system. Indeed, the crisis management process had a
troubling feature: The institutions with the greatest power
and therefore most extensive responsibilities under the
Constitution—the presidency and Congress—contributed
very little to the policies that mitigated the economic
shocks. While the presidency had been at the center of
the Cold War political-military crises, making the ultimate
decisions and rallying public support for them, in the 2008
financial crisis President George W. Bush appeared to have
delegated the authority of the executive branch to the
secretary of the Treasury. Congress came into the picture
when it was asked to provide an emergency injection of
funding to support the financial system in the form of
TARP. But the House of Representatives initially rejected
the program on Sept. 28, 2008, sending a shudder through
financial markets in the United States and elsewhere,
before it finally passed the necessary legislation on Oct.
3. In general, the bulk of the crisis remediation came from
the Federal Reserve, which is the least democratic, in the
sense of being the least publicly accountable, part of the
federal government. Its insulation from public pressure
enabled the Fed to operate swiftly, effectively and on a
large scale during the crisis, but also made the measures
it took less comprehensible to and less popular with the
public than would have been the case had the president
and Congress been identified with them. Moreover, post-
crisis legislation has curtailed some of the Fed’s powers,
and to be successful over the long term in a democracy
such as the United States, a program of any kind, including
a financial program, must have public support. Moreover,
the polarization of the political system makes any major
legislation, no matter how urgent, difficult to pass.
Polarization may even create crises, for example if Congress
follows through on the threat some of its members
have made to refuse to raise the nation’s debt ceiling
when necessary unless substantial reductions in federal
spending take place. Without an increase in the debt limit,
it is conceivable that the United States could, for the first
time in its history, actually default on its debt payments.
This is highly unlikely but unfortunately not impossible.
Score: 7
INCRA USA Ratings Report
4 6
Is the signaling process between decision makers (the government, central bank, employers and employee representatives) so well established that confusion about (and resistance to) the expected outcome of decisions by one decision-maker on the others can be avoided or at least minimized?There is adequate communication among the relevant
parties in the political and economic systems in the
United States. What is lacking is sustained cooperation,
due less to the constitutionally mandated separation of
powers than to the sharp ideological polarization of the
second decade of the 21st century.
Score: 8
Are there constitutionally anchored and politically accepted procedures for sequencing and timing countermeasures in a crisis?There are no such procedures. Usually the country looks
to the president to chart a response to a crisis and
orchestrate the policies necessary to follow it. In 2008,
although the country did cope more or less adequately
with the financial crisis once it erupted (as opposed to
preventing it in the first place), this pattern did not occur
in precisely the way that it had in the past.
Score: 6
What is the special international economic role of the United States?One particular feature of the U.S. role in the global
economy is germane to assessing its credit rating. The
United States supplies the currency most widely used
globally as a reserve. Other countries hold more than 60
percent of their reserves in dollar-denominated assets.
Because this produces wider tolerance among other
countries for economic policies that incur the rebuke of
markets when carried out by a country other than the
United States, it gives the U.S. government greater scope
for such policies. In other words, America’s credit receives
a boost in practice from the special status of the dollar,
which is bolstered by the fact that the other two plausible
candidates to serve as reserves—the euro and the Chinese
renminbi—are for different reasons unsuitable for the task
at present. Uncertainty surrounds the euro because of the
difficulties some of its members have had in financing their
deficits; as for the renminbi, the Chinese economy is too
tightly controlled by the ruling Communist Party to make
it attractive for others to hold its currency on a large scale.
The dollar’s dominance carries with it a danger, however,
especially in view of America’s clouded fiscal prospects: It
means that if other countries and global markets should
lose confidence in the dollar, the consequences for both
the American and world economies would be particularly
severe. A run on the dollar could do more damage than
the instability of the euro that began in 2011 or the crash
of Asian currencies in 1997 and 1998.
Score: 8
INCRA USA Ratings Report 4 7
CO
NC
LUS
ION
The Overall Objective of This ReportThis sample rating report is the logical next step for INCRA
to demonstrate that the current system of sovereign
ratings can be changed. All six of our INCRA sample
ratings, including the US rating, prove that:
• Transparency—providing all the data, background
information and average scores from committee voting—
can be a basic principle of sovereign risk assessment.
• A broader understandability of sovereign ratings can be
achieved by introducing new forms of presentation, such
as our “rating radar.”
• Both quantitative and qualitative indicators should be
included in every sovereign risk analysis.
In essence, we believe it is time to change the public
narrative about sovereign ratings. Instead of viewing them
as a “national insult” in the case of a downgrade or as an
unpredictable and not serious assessment of a country,
they should be seen as a starting point for an in-depth
debate about the reforms a country might need.
Overall, we still believe CRAs need major improvements.
Since sovereign ratings are public goods, it should be the
responsibility of all the major societal players to support
their improvement. As such,we still advocate that the G20,
representing the most important economic and financial
players in today’s world, is the best forum within which to
evaluate the political will for founding a new institution
that will be embedded not only in financial markets but
also in society in general. Additionally, corporate players,
NGOs and foundations should make commitments to help
improve the sovereign risk sector.
The first INCRA report and this report demonstrate that
there is an alternate way to address the highly important
and sensitive issue of how sovereign ratings are conducted.
The second INCRA report, with its sample ratings of
Brazil, France, Germany, Italy and Japan, along with this
US rating report, show that INCRA’s methodology works
for assessing sovereign risk and can provide investors
and the public with a clear, transparent assessment of a
country’s outlook. INCRA is an innovative solution that
merges the changing demands and interests of investors
assessing sovereign risk and the desire of governments
and the broader public for more transparency, legitimacy
and accountability.
As the sample ratings prove, in order to evaluate a country’s
willingness to repay its debts, a more comprehensive set
of indicators is needed. That is why INCRA, as shown in
this report, would conduct its sovereign risk assessments
using a set of macroeconomic and FLI that will provide
the basis for high-quality analysis. The FLI capture a more
meaningful picture of a country’s long-term socioeconomic
and political prospects and the potential political and
social constraints on its ability and willingness to pay
back its debt. In this regard, INCRA would be an incubator
for best practices in sovereign risk analysis.
The financial realities of the 21st century have already
outpaced the traditional trans-Atlantic partnership. INCRA
reflects the new realities of an increasingly globalized
financial world. The quality of sovereign ratings is crucial
not only for Europe and the US, but also for emerging
economies such as China, India, Brazil and Mexico, etc.
Therefore, INCRA would help guarantee the participation
of all the relevant international players—it would be the
first truly international CRA.
But in order to create a more coherent international
system for CRAs, whether they are for-profit or non-profit,
we need a broader dialogue on how to overcome the
irresponsible fragmentation of regulatory requirements
around the world. A broadly accepted and implemented
international regulatory framework must be developed to
oversee and govern this sector in the future.
Beyond that, there are further challenges ahead in order to
bring INCRA fully to life:
1. Investors may need to change their organizational
behavior. Though they are frustrated to some extent
with the current system, most investors continue to rely
on information from the big three CRAs, whose ratings
are often embedded in internal investment guidelines.
INCRA will be seen as the “new kid on the block” of the
CRA world. Its model needs to be robust enough to
convince investors that it will provide added value for
their investment decisions.
2. Governments must take a stand. They must turn from
simply criticizing how sovereign ratings are conducted
to reforming the system in a way that is convincing and
sustainable.
3. Representatives of the non-profit sector, whether they
are NGOs or foundations, need to be encouraged to
play a meaningful role in the financial world.
CONCLUSION
4 8
The members of the G20 have already made it clear that
CRAs need to be reformed. As we have explained, the G20
would be the best forum to evaluate the political will of
key players to give the new institution a chance.
Changing the current system requires bold and big
thinking. INCRA is a big idea based on a reasonable
operational concept. It would require an endowment of
$400 million. At first glance this is a lot of money, but it is
a small, manageable investment if divided among multiple
funders. In comparison to the hundreds of billions of
dollars already paid for public bailouts—partially the
result of flawed corporate and sovereign risk analysis—
such an investment is a modest and safe call.
INCRA has the potential to become a cornerstone of a
financial system capable of dealing with 21st century
problems. As the sample rating in this report will
demonstrate, not only do we need different institutions to
assess sovereign risk, but we also need a more coherent
and transparent methodology to analyze that risk. What is
required now is the political will and support of visionary
leaders around the world.
INC
RA
RA
TIN
GS
SC
AL
E
INCRA RATINGS SCALE
INCRA USA Ratings Report 4 9
8.00 - 10.00 AAA
7.70 - 7.99 AA+
7.30 - 7.69 AA
7.00 - 7.29 AA-
6.70 - 6.99 A+
6.30 - 6.69 A
6.00 - 6.29 A-
5.00 - 5.99 BBB+
4.00 - 4.99 BBB
3.00 - 3.99 BBB-
2.00 - 2.99 Below investment grade
1.00 - 1.99
MACROECONOMIC INDICATORS CODEBOOK
I. Economic Fundamentals
Real GDP Growth (%)Is real GDP growth adequate to raise real income over time and sufficient to satisfy domestic political needs?
1 2 3 4 5 6 7 8 9 10
Totallyinadequate
Substantiallyexceedsneeds
GDP per capita (current exchange rates in US$) and GDP per capita (PPP basis: US$)What is the level of wealth and development of a country? GDP per capita (PPP basis) is within which percentile, and what is expected to happen over time?
1 2 3 4 5 6 7 8 9 10
LowestLowerMiddle
IncomeCountries
UpperMiddleIncomeCountries
HighIncomeCountries
Highest
Real Exports (% Change)What is the importance of exports in this country’s performance?
1 2 3 4 5 6 7 8 9 10
Exportsectorperformingpoorly
Exportsectorperformingwellorexportsnotimportanttocountry’s
performance
Real Imports (% Change)To what extent is the country’s performance affected by its import needs?
1 2 3 4 5 6 7 8 9 10
Importneedsarehigh/importneedsare
affectingthecountry’s
performance
Importneedsarelow/importneedsare
notaffectingthecountry’sperformance
5 0
MA
CR
OE
CO
NO
MIC
IND
ICA
TO
RS
CO
DE
BO
OK
Gross Domestic Investment/GDP (%)Is a country’s investment ratio sufficient to address its development needs and support infrastructure at a level that will not hinder growth?
1 2 3 4 5 6 7 8 9 10
Investmentratioinsufficient
Investmentratiosufficient
How does a country’s investment ratio compare now and is expected to compare in the future to the median of its income peers?
1 2 3 4 5 6 7 8 9 10
Investmentratioissignificantlybelowpeer
median(currentorexpected)
Investmentratioisatpeermedian
(currentorexpected)
Gross Domestic Savings/GDP (%)To what extent is a country’s savings ratio sufficient to support necessary investment without causing balance of payments problems?
1 2 3 4 5 6 7 8 9 10
Savingsratioinsufficient
Savingsratiosufficient
How does a country’s savings ratio compare now and in the future to the median of its income peers?
1 2 3 4 5 6 7 8 9 10
Savingsratioissignificantlybelowpeer
median(currentorexpected)
Savingsratioisatpeermedian
(currentorexpected)
INCRA USA Ratings Report 5 1
Inflation/CPI (%)Are price changes distorting economic decision making, either through excessive inflation or deflation, and how will price changes affect future economic performance?
1 2 3 4 5 6 7 8 9 10
Pricechangesalreadyorarelikelytocausemajor
problemsfortheeconomy(e.g.hyperinflationorperniciousdeflation)
Pricechangesarenotcreating,
norlikelytocreateadistortion
Population Growth (% Change)Is a country’s demographic trajectory beneficial or burdensome to long-term economic performance and sustainability of the social security system?
1 2 3 4 5 6 7 8 9 10
Highlyburdensome
Highlybeneficial
1 2 3 4 5 6 7 8 9 10
Debt/GDPratiosignificantlyconstrainseconomicprogress
Debt/GDPratiodoes
notconstraineconomicprogress
How does a country’s debt/GDP ratio compare to its income peers today and in the future?
1 2 3 4 5 6 7 8 9 10
Debt/GDPratioissignificantlyhigherthanpeermedian(currentorexpected)
Debt/GDPratioisatorbelowpeermedian(currentorexpected)
II. Public Sector Policy
General Government Debt/GDP (%)To what extent does a country’s debt/GDP ratio constrain its economic progress?
5 2
MA
CR
OE
CO
NO
MIC
IND
ICA
TO
RS
CO
DE
BO
OK
Nominal GDP Growth (Local Currency %)Is expected nominal GDP growth adequate to meet government financing over time?
1 2 3 4 5 6 7 8 9 10
Totallyinadequate
Substantiallyexceedsneeds
General Government Debt/General Government Revenue (%)To what extent does a country’s debt/ revenue ratio put pressure on revenue generation and constrain the government’s spending flexibility?
1 2 3 4 5 6 7 8 9 10
Debt/revenueratiosignificantconstraint
Debt/revenuerationotaconstraint
How does a country’s debt/GDP ratio compare to its income peers today and in the future?
1 2 3 4 5 6 7 8 9 10
Debt/revenueratiois
significantlyhigherthanpeermedian(currentorexpected)
Debt/revenueratioisatorbelowpeer
median(currentorexpected)
General Government Interest/General Government Revenue (%)To what extent does a country’s debt service costs put pressure on revenue and spending flexibility?
1 2 3 4 5 6 7 8 9 10
GGinterest/revenueratioisasignificantconstraint
GGinterest/revenueratioisnotasignificant
constraint
How does a country’s GG interest/revenue ratio compare to its income peers today and in the future?
1 2 3 4 5 6 7 8 9 10
GGinterest/revenueratioissignificantlyhigherthanpeermedian(currentorexpected)
GGinterest/revenueratioisatorbelowpeermedian(currentorexpected)
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General Government Primary Balance/GDP (%)How large is the primary deficit or surplus, and what is expected in the future?
1 2 3 4 5 6 7 8 9 10
Countryhassignificant
primarydeficit(currentorexpected)
Countryhassignificant
primarysurplus(currentorexpected)
General Government Revenue/GDP (%)How broad-based is the tax system and what is the rates’ level? Can the latter be adjusted easily? How flexible is the revenue structure?
1 2 3 4 5 6 7 8 9 10
Narrow,inflexibletaxsystemandinflexiblerevenuestructure
Broad-based,flexibletaxsystemandrevenuestructure
General Government Expenditure/GDP (%)How effective are expenditure programs and infrastructure? To what extent does the pension system affect expenditure flexibility?
1 2 3 4 5 6 7 8 9 10
Ineffectiveexpenditureprograms;pension
systemreducesexpenditureflexibility
Effectiveexpenditureprogramsinplace;pensionsystemallowsexpenditureflexibility
5 4
MA
CR
OE
CO
NO
MIC
IND
ICA
TO
RS
CO
DE
BO
OK
1 2 3 4 5 6 7 8 9 10
Notaccommodative
Veryaccommodative
III. Monetary Policy
Is monetary policy accommodative?
1 2 3 4 5 6 7 8 9 10
Domesticcredit/GDPratiofarhigherorlowerthanpeers(currentorexpected)
Domesticcredit/GDPratio
similartopeers(current)
IV. Capital Markets and Financial Risk
Domestic Credit/GDP (%)Is the domestic credit/GDP ratio consistent with the country’s economic progress, and is it likely to be so in the future? (If possible, countries should be compared to peers: High-income countries automatically receive a 10. Middle or low-income countries need to be compared to their peers.)
1 2 3 4 5 6 7 8 9 10
CreditgrowthisfarinexcessofnominalGDP
growth
CreditgrowthisnearorbelownominalGDPgrowth
Domestic Credit (% Change)Is domestic credit growth a potential source of credit risk now or in the future? (If future trends are expected to be different, then adjustments need to be made in the final score.)
What is the overall strength of the banking sector?
1 2 3 4 5 6 7 8 9 10
Bankingsectorisweak;non-
performingloansaccountformorethan10%oftotalloansforthesystem
Bankingsectorisstrong;Non-performingloanscomprisenomorethan2%oftotalloansfor
thesystem
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1 2 3 4 5 6 7 8 9 10
Anydeficitinexcessof10%ofGDPtodayorexpectedinthe
future
Anycountry,whichhas
maintained,andappearslikelytocontinuetomaintainacurrentaccountsurplusinexcessof5%ofGDP
V. External Sector
How does an emerging market (EM) country’s current account position affect its development today and in the future?
How does an EM country’s current account position compare to its peers today and in the future?
1 2 3 4 5 6 7 8 9 10
Anydeficitinexcessof10%ofGDPtodayorexpectedinthe
future
Anycountry,whichhas
maintained,andappearslikelytocontinuetomaintainacurrentaccountsurplusinexcessof5%ofGDP
1 2 3 4 5 6 7 8 9 10
Debtservicecostsgreatlyconstrain
developmentalprogress
Debtservicecostsdonot
greatlyconstraindevelopmental
progress
External Debt (US$)*, External Debt/GDP (%)* and External Debt/Exports ratio (%)*How does an EM country’s external indebtedness constrain its developmental progress?
1 2 3 4 5 6 7 8 9 10
Debtserviceratiois
significantlyhigherthanpeermedian(currentorexpected)
Debtserviceratioratioisatorbelowpeermedian(currentorexpected)
How does an EM country’s debt service ratio compare to its income peers today and in the future?
5 6
MA
CR
OE
CO
NO
MIC
IND
ICA
TO
RS
CO
DE
BO
OK
1 2 3 4 5 6 7 8 9 10
Country’sdebt/reservesratioisinexcessof100%andisfarinexcessofitspeermedian(currentorexpected)
Country’sdebt/reservesratioisequalto100%(currentorexpected)
Coverage by Reserves
External Debt/International Reserves (%)* [Foreign Exchange Reserves (US$)* is the same thing as International Reserves]How significant is an EM country’s debt/reserves cover to avoid financial risk? (What does this imply about the possibility of a debt crisis?)
1 2 3 4 5 6 7 8 9 10
ExpectedM2/FXreservesratioinexcessof6
ExpectedM2/FXreservesratiois1
M2/Foreign Exchange Reserves*Does the ratio of M2/FX reserves pose a risk today or in the future of capital flight in an EM country?
1 2 3 4 5 6 7 8 9 10
Lessthan1monthtodayorinthefuture
Oneyear’scovertodayorinthe
future
Reserves to Imports (months)*How many months of imports of goods and services does an EM country’s international reserve cover today and in the future?
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1 2 3 4 5 6 7 8 9 10
Debtserviceratioatorabove100%(currentor
expected)
Debtserviceratiolessthan15%(currentorexpected)
Composition of Debt Servicing
Debt Service Ratio (%)*Is an EM country’s debt service ratio manageable today and in the future?
1 2 3 4 5 6 7 8 9 10
Short-term/externaldebtratioisnear
100%
Short-term/externaldebtratioislessthan20%(currentorexpected)
Short-Term External Debt/Total External Debt (%)*How pressing is an EM country’s short-term external debt on the ability of an EM country to have market access today and in the future?
1 2 3 4 5 6 7 8 9 10
RatiosignificantlyinexcessofEM
peers
Ratiooflessthan100%(currentorexpected)
External Short-Term Debt + Current Maturities Due on Medium-to-Long External Debt/FX Reserves (%)*How well positioned is an EM country to sustain a loss of market access?
1 2 3 4 5 6 7 8 9 10
Ratiofarinexcessof1.00
Ratioofclosetozero
Liquidity RatioTotal Liabilities Owed to Bank for International Settlements Banks/Total Assets Held in BIS Bank (%)*
5 8
Bertelsmann Foundation1101 New York Avenue, NW, Suite 901 Washington, DC 20005USAmain phone +1.202.384.1980main fax +1.202.384.1984
www.bfna.org
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