Economic Statecraft and Country Risk: Managing the Increasing Use of Economic Policy Tools to Achieve Foreign Policy Goals

Major geopolitical blocs, notably the West and China, increasingly fragment the global economic  landscape, while non-aligned nations emerge as pivotal yet unpredictable players. As major  powers like the U.S. leverage economic policies such as sanctions, tariffs, and export controls to  pursue national security objectives and redress of trade imbalances, globalization is being  redefined as many countries adopt strategic responses to such actions including friend-shoring,  decoupling, and de-risking. These shifts generate significant systemic risks for multinational  institutions navigating an increasingly polarized and politicized economic environment. 

This Capstone project supported Goldman Sachs' Sovereign and Economic Risk Group (SERG)  by exploring the relationship between economic statecraft tools and country risk. The Capstone team conducted an extensive literature review, developed a comprehensive "flow framework" categorizing these tools, and formulated five critical "rules of thumb" for evaluating their impacts. Guided by these  insights, they further analyzed market reactions and sectoral impacts. Additionally, they tested out three robust quantitative measurement methods: a two-way fixed  effects regression to explore causal relationships between economic statecraft tools and  sovereign risk indicators, including credit ratings and Credit Default Swap (CDS) spreads; a  ChatGPT-assisted textual analysis leveraging prompt engineering on a decade-long Moody’s  dataset to retrospectively connect rating actions with specific economic interventions; and a  random forest approach to identify critical factors influencing rating changes. Overall, the research and analyses reveal a measurable and growing impact of economic statecraft on global  economics and sovereign ratings, though quantifying exact magnitudes and establishing precise  causality remain challenging due to data constraints and varying contextual factors.