The Empire Effect:The Determinants of Country Risk in the First Age of Globalization,1880-1913 NIALL FERGUSON AND MORITZ SCHULARICK This article reassesses the importance of colonial status to investors before 1914 by means of multivariable regression analysis of the data available to contempo- raries.We show that British colonies were able to borrow in London at signifi- cantly lower rates of interest than noncolonies precisely because of their colonial status,which mattered more than either gold standard adherence or the sustain- ability of fiscal policies.The "empire effect"was,on average,a discount of around 100 basis points,rising to around 175 basis points for the underdevel- oped African and Asian colonies.Colonial status significantly reduced the de- fault risk perceived by investors. It was obvious to contemporaries-among them John Maynard LKeynes-that membership in the British Empire gave poor countries access to the British capital market at lower interest rates than would have been required had they been politically independent.For liberal critics of the empire,this "empire effect"seemed detrimental to the economic health of the British Isles,which might otherwise have at- tracted a higher proportion of aggregate investment.Later historians agreed that this was one of the ways in which,by the later nineteenth century,the empire had become a drain on British resources.From the point of the view of the colonies,on the other hand,the ability to raise funds in London at relatively low interest rates must surely have been a benefit-a point seldom acknowledged by critics of imperialism. But did the empire effect actually exist other than in contemporary imaginations?Recent econometric studies of financial markets before the First World War have pointed instead to the gold standard as confer- ring a "good housekeeping seal of approval,"which lowered the bor- The Journal of Economic History,Vol.66,No.2 (June 2006).The Economic History Association.All rights reserved.ISSN 0022-0507. Niall Ferguson is Laurence A.Tisch Professor of History,Harvard University,Minda de Gunzburg Center for European Studies,27 Kirkland St.,Cambridge MA 02138.E-mail: nfergus@fas.harvard.edu.Moritz Schularick is Senior Economist at Amiya Capital,London: and Visiting Lecturer,Free University Berlin;John-F.-Kennedy-Institute,Lansstr.7,14195 Berlin,Germany.E-mail:mschularick@yahoo.de. We are grateful to Nitin Malla for research assistance.We would also like to thank Michael Bordo,Michael Clemens,Warren Coats,Marc Flandreau,Carl-Ludwig Holtfrerich,Trish Kelly. Chris Meissner,Ronald Oaxaca,Thomas Pluemper,Hugh Rockoff,Martin Schueler,Irving Stone,Nathan Sussman,Alan Taylor,Adrian Tschoegl,Marc Weidenmier,and Jeffrey Williamson for comments or assistance with the construction of the dataset.Three anonymous referees provided helpful suggestions. 283283 The Empire Effect: The Determinants of Country Risk in the First Age of Globalization, 1880–1913 NIALL FERGUSON AND MORITZ SCHULARICK This article reassesses the importance of colonial status to investors before 1914 by means of multivariable regression analysis of the data available to contempo￾raries. We show that British colonies were able to borrow in London at signifi￾cantly lower rates of interest than noncolonies precisely because of their colonial status, which mattered more than either gold standard adherence or the sustain￾ability of fiscal policies. The “empire effect” was, on average, a discount of around 100 basis points, rising to around 175 basis points for the underdevel￾oped African and Asian colonies. Colonial status significantly reduced the de￾fault risk perceived by investors. t was obvious to contemporaries—among them John Maynard Keynes—that membership in the British Empire gave poor countries access to the British capital market at lower interest rates than would have been required had they been politically independent. For liberal critics of the empire, this “empire effect” seemed detrimental to the economic health of the British Isles, which might otherwise have at￾tracted a higher proportion of aggregate investment. Later historians agreed that this was one of the ways in which, by the later nineteenth century, the empire had become a drain on British resources. From the point of the view of the colonies, on the other hand, the ability to raise funds in London at relatively low interest rates must surely have been a benefit—a point seldom acknowledged by critics of imperialism. But did the empire effect actually exist other than in contemporary imaginations? Recent econometric studies of financial markets before the First World War have pointed instead to the gold standard as confer￾ring a “good housekeeping seal of approval,” which lowered the bor￾The Journal of Economic History, Vol. 66, No. 2 (June 2006). © The Economic History Association. All rights reserved. ISSN 0022-0507. Niall Ferguson is Laurence A. Tisch Professor of History, Harvard University, Minda de Gunzburg Center for European Studies, 27 Kirkland St., Cambridge MA 02138. E-mail: nfergus@fas.harvard.edu. Moritz Schularick is Senior Economist at Amiya Capital, London; and Visiting Lecturer, Free University Berlin; John-F.-Kennedy-Institute, Lansstr.7, 14195 Berlin, Germany. E-mail: mschularick@yahoo.de. We are grateful to Nitin Malla for research assistance. We would also like to thank Michael Bordo, Michael Clemens, Warren Coats, Marc Flandreau, Carl-Ludwig Holtfrerich, Trish Kelly, Chris Meissner, Ronald Oaxaca, Thomas Pluemper, Hugh Rockoff, Martin Schueler, Irving Stone, Nathan Sussman, Alan Taylor, Adrian Tschoegl, Marc Weidenmier, and Jeffrey Williamson for comments or assistance with the construction of the dataset. Three anonymous referees provided helpful suggestions. I