Julia Gray. 2013. The Company States Keep: International Economic Organizations and Investor Perceptions (New York: Cambridge University Press)

Book Review of Julia Gray. 2013. The Company States Keep: International Economic Organizations and Investor Perceptions (New York: Cambridge University Press) J. Lawrence Broz The Review of International Organizations. Published online 10 April 2014 This excellent book is about the impact of membership in international economic organizations (IEOs) on sovereign credit risk. Gray’s key intuition is that membership changes in organizations like the European Union (EU) and Mercosur are public events; therefore, when the professional investment community observes such changes, they reassess the creditworthiness of sovereign borrowers. When, for example, a high risk country joins an organization composed primarily of low risk members, the entrant will be viewed more favorably by the investment community. In Gray’s terms, the entrant has joined a more prestigious “peer group” and is rewarded for this status upgrade with a lower interest rate. By the same token, the existing members of the organization, having added a riskier member into their ranks, will see an increase in their costs of borrowing, as investors sense that the peer group has been “diluted” by the new member. Sovereign credit risk is thus affected by “The Company States Keep.” There’s more to it that, however. Gray’s most remarkable claim is that the effect of membership on sovereign risk is independent of anything that the organization does or demands of its members. Organizations like the EU have rigorous accession requirements that aspiring entrants must meet. Such organizations also have laws and institutions that constrain their members’ policy flexibility, as well as enforcement mechanisms to ensure that members stay within the rules. Scholars of international organizations have studied these features in depth under the “legalism” and “rational design” frameworks. But Gray argues that institutional factors matter less to investor perceptions than the reputations of the national governments that populate international institutions. In this sense, Gray brings “the state” into the study of international organizations for the first time. To support the claim that the character of member states affects sovereign risk independently of institutional or other factors, Gray addresses a host of alternative arguments in her regressions. She controls for prior domestic reforms enacted as part of the requirements for entry, as well as for policy reforms made after a nation enters an organization. She also addresses selection bias and endogeneity, as well as the institutional features of IEOs that are commonly associated with rule enforcement and constraints on behavior. Remarkably, Gray finds that state membership matters above and beyond these other covariates. Her results imply that membership in international economic organizations is something like a brand name. If two countries were identical in every way except that one of them is a member of a “high-quality” international organization and the other is not, the former country would enjoy a lower interest rate than the other. Importantly, “high quality” refers not to the norms, laws, and institutions of the international economic organization. In the limit, the organization could be nothing but a meaningless placeholder. Instead, “high quality” refers to the reputations of the other members of the organization.