The Empire Effect: Country Risk in the First Age of Globalization, 1880-1913

Would the movement of capital from to poor countries greatly increase, if the commitment to protecting property and allowing capital to move freely were more credible? This paper asks whether the British Empire provided global public goods that supported large-scale development finance before 1914. We reassess the importance of colonial status to investors by means of multivariable regression analysis. We show that British colonies were able to borrow in London at significantly lower rates of interest than non-colonies precisely because of their colonial status, which overruled economic factors. We conclude that these findings have important implications for the current globalization debate: lacking jurisdictional integration is a major impediment to capital flows from rich to poor.