BSR: Governance by Indicators – the politics of credit rating


Noise at the neighbours’

Our neighbour, South Africa, is going through an interesting phase with major ructions within the ruling party and across the country. This comes in the wake of a major and highly controversial cabinet reshuffle by President Zuma, in which the Finance Minister Pravin Gordhan, was the biggest casualty. President Zuma was accused by his critics of effecting the reshuffle in order to promote patronage and facilitate corruption. He was also accused of undermining state institutions, which follows a damning report last year on state capture by the Public Protector. Even some of his senior colleagues, including Deputy President Cyril Ramaphosa expressed dismay at the reshuffle.

The announcement had immediate impact on the capital markets, one of the first signs being the sharp fall of the national currency. A significant development was the almost immediate downgrading of South Africa’s credit rating to junk status by the world’s largest credit rating agency, Standard & Poor. There has been a rise in calls for President Zuma to leave office. These problems are likely to continue for some time. Some commentators have quickly drawn comparisons between Zimbabwe and South Africa. While one can see the temptation to draw comparisons between the neighbours, a lot of them have been tedious and lacked nuance and one gets a distinct impression that Zimbabwe is invoked to alarm rather than to engage in robust and honest analysis.

I intend to address this comparative discourse another day but on this occasion, my interest is drawn to the issue of downgrading South Africa’s credit rating in the wake of the reshuffle, which I would like to place within the discourse of global governance.  Global governance is, of course, a complex matter but this occasion offers us an opportunity to make sense of some of the technologies of global governance and how we might react to and engage them. Although it might sound too academic and unattractive, I hope it will challenge and expand our thinking as citizens of Africa on the complexities of global governance. In this regard, I only use the credit rating saga in South Africa as an example, but the analysis could be used widely as indeed some illustrations in this piece will demonstrate.

Understanding global governance

The technology of global governance with which I’m concerned in this article is called governance by indicators. I’m interested in how this technology of global governance impacts on the local. However, first we must understand the meaning of global governance.

Global governance scholars Davis, Kingsbury and Kerry have described “governance” as comprising the means employed to “influence behaviour, the production of resources, and the distribution of resources.” These means can be used by or through or beyond the state. While most people often use the words “government” and “governance” interchangeably, they are not the same. Government is the agency through which the power of the state is employed. It exercises power or authority through the structures of the state. However, governance is broader, encompassing different forms and mechanisms through which conduct is controlled and regulated. Authority is not merely control by the sovereign but it can be defined by the consent and participation of those who are governed. Governance can be deployed through multiple mechanisms and beyond the state. It is these means and mechanisms that are referred to as technologies of governance.

Law is probably the most well-known and common of these technologies. However, it is by no means the only technology of governance. Other technologies include education, advertising, military action, networks, cultural norms, informal practices, even architectural designs. In this scheme of things government as it is more widely known in the political form is only one of the actors that play a role in governance. Others include the family, the firm, the church and the individual. All these technologies of governance have a variety of influences upon the governed. These influences can be physical, social or economic.

“Global governance” refers to the extension of governance beyond the state. This has become more pertinent in the age of globalisation, where there are global corporations and highly mobile citizens, goods and services. It represents an implicit recognition of the limitations of the state and the need for other agencies and technologies to be deployed to deal with global challenges. Consequently, there has been a growth of intergovernmental and transnational organisations and networks, including international non-governmental organisations, all of which have a role in global governance. These transnational actors operate as standard-setting agencies, often generating international standards and norms in specific areas to deal with transnational challenges. This is evident in different areas, including finance and banking, human rights, environment and climate change, animal welfare and others. Government and its agencies within the state are subjects of global governance. By this I mean they are subject to governance by agencies outside the state.

A good example is a transnational network called the Basel Committee on Banking Supervision, which is responsible for setting standards for banking supervision and capital adequacy rules that are generally followed by national regulators. Another is the Financial Action Task Force, which sets rules for the prevention of money laundering and terrorist financing. The rules generated by these transnational networks affect domestic policies and laws within states. These transnational networks are just one of the technologies of global governance.

Likewise, indicators are another technology of global governance and they play an important role in influencing behaviour of national and local authorities within states. We could do an analysis of the politics around transnational networks and how they affect developing countries but on this occasion, my interest is restricted to the use of indicators and how they influence government and other actors involved in governance. Having defined governance, global governance and technologies of government, the stage is now set to explain indicators as a technology of governance.

Indicators as technologies of government

Davis et al, provide a useful working definition for an indicator as “a named collection of rank-ordered data that purports to represent the past or projected performance of different units.” Nguyen describes them as “report cards evaluating performances, usually of government actors.” A good example of an indicator is the university league table, which ranks universities according specific criteria. This process of ranking involves generating data through simplification of large amounts of raw and often complex data in respect of a social phenomenon. Indicators therefore contain simplified and processed data which can be used for comparative purposes, between units or over time. Units of comparison could be companies or states in respect of a specific phenomenon and by reference to certain defined standards. In effect, indicators are based on performance evaluation. An example of an indicator is the Corruption Index by Transparency International. It measures a country’s performance in respect of performance, giving indications on which are the most or least corrupt countries. Another example is the Doing Business Index, by the International Finance Corporation, the private arm of the World Bank. There has been an increase in the use of indicators in recent years and one can include the Global Competitiveness Report of the World Economic Forum, the Human Development Index run by the UNDP, etc.

In addition to these widely-known indicators, indicators can also be produced by private actors as part of their commercial purposes. These include credit ratings by credit rating agencies. They rate the credit-worthiness of states, companies, individuals, and their assets. Credit ratings are therefore indicators and a technology of global governance and it is important to analyse them in that context. I will come back to credit ratings but first I will discuss the role of indicators more generally as a technology of global governance.

Role of indicators in global governance

Indicators have increasingly become influential in global governance. Indicators have appeal across a range of actors. They respond to demand for easily accessible information.  By simplifying complex raw data on a phenomenon, they make it more accessible and easier to process by users. It could be a student choosing between universities or an investor looking to invest in a country. An investor will rely on the credit-rating agency’s report and they may look to the Doing Business Index, or Transparency International’s Corruption Index. The entities that are ranked might find advertising opportunities through the indicators. If a state, company or university enjoys a top-ranking, this would count as great for their publicity.

Alternative to law

As Davis, et al have confirmed, indicators can both be “alternatives to and objects of legal regulation”. In other words, they can be used in place of law or they can be objects of legal regulation. In their study, the authors found that the use of indicators in global governance has important implications on the “topology of global governance” – that is on the questions of who governs and who the governed are. It raises questions about the exercise and distribution of power. As we shall see, as a technology of global governance, indicators impact upon the behaviour of states and their agencies, demarcating what can or cannot be done.


The use of indicators for evaluation means there must be evaluators and these evaluators have the power to influence the evaluated. As tools for evaluation, they set standards against which performance is measured. Hence they make a claim of what counts as the ideal standard and it is against that standard that performance is measured. However, this also means indicators represent a theory or ideology of what constitutes a “good” or “ideal”. In this way, as Nguyen points out, indicators are produced as “markers for larger policy ideas”. In this way, the world is understood in a manner that appears objective but this hides the underlying theory or ideology behind the indicator. This technology of governance therefore confers power upon those that generate indicators – the evaluators. But this raises important questions: how is this power exercised, regulated and controlled? These are important questions, particularly when the identity and location of producers of indicators and the methods they use are investigated. While indicators are often presented as neutral and objective and claim authority on the basis that they are generated through scientific processes, it goes without saying that they are also prone and subject to contestations.

Rise of the unelected

Since indicators are a technology of governance, it means those that produce indicators must be regarded as “governors” as they clearly have a role in governing at the global level. As we have observed, indicators constitute “governance at a distance”, where power is exercised beyond the state and through other actors. They demonstrate how power can be deployed and exercised beyond the state. Producers of indicators have power over a diverse and geographically dispersed population. This power of producers of indicators is evident in the case of credit rating agencies, whose announcement not only gets a reaction from government and the markets, but also from the media and the general public. There are complex power relations between those that measure (the governors) and those that are measured (the governed). In the case of credit-rating agencies, they of their own accord, impose their power over the states whose creditworthiness they measure.

Another dimension is that indicators enhance the power of epistemic or knowledge communities – the experts. It is these experts who provide intellectual backing to indicators or the ideologies and theories that inform them. The power wielded by experts in global governance is subsumed under the rubric of the rise of the unelected in governance.

Influence on domestic policy and law

Apart from decision-making processes, indicators play an important role in setting standards and policy-making as well as legal reforms. The allocation of resources by international development institutions and aid agencies is often tied to indicators such as good governance, democracy and the rule of law. Investors used Doing Business Index and credit-rating to assess risk and opportunities. Scholars like Nguyen, Davis et al, have confirmed the “tremendously influential” role of indicators in domestic affairs, such as policy-making. For example, due to its importance, states make an effort to improve their Doing Business Index rankings. Nguyen has stated that global indicators influenced Vietnam to make the idea of national competitiveness a national priority. The usual way of achieving this “improvement” in national competitiveness is to promote policy-changes and legal reforms in the direction dictated by the Doing Business Index. In other cases, aid is tied to making improvements to the Doing Business environment. This means in order to qualify for support a country has to change its laws and regulations. These changes might have very little to do with the demands of the local population but developing states often have no choice but to comply lest they be excluded.

Since the media gives publicity to these indicators, placing them on a pedestal as authoritative, it is not just investors who use them but the states and agencies that are assessed end up giving them more weight as they rely upon them too for policy-making and legal reforms. This relationship between indicators and domestic policy-making and legal reforms is a clear demonstration of the influence that indicators have over and within the state. However, most ordinary people are often oblivious of the pervasive influence of these technologies of governance such as indicators and how they are probably more powerful than their own views.

Ideological biases

An important observation on indicators is that while there is a claim for objectivity, they are not free from the theoretical or ideological biases of their generators. As Davis et al have pointed out, “Each indicator set bolsters a particular view of development with a combination of scientific authority and organisational strength”. In her study of the impact of indicators in Vietnam, Nguyen confirms that both local and global indicators have had an important role in shaping the developmental agenda and policies in the country. She confirms that “In the sphere of international development, indicators wield enormous power. They are increasingly popular and are widely captured and circulated by the media. The Doing Business Index is again a useful example. Essentially, this indicator measures the ease with which business can be conducted in a particular country. The criteria for what constitutes ease of doing business reflects the ideology of the indicator’s producers. Thus they prioritise formal legal rules over informal practices. They also place a high premium on the protection of property rights. These biases towards a neo-liberal capitalist ideology have resulted in contestations.

In the past, the Doing Business Index was criticised for preferring a labour market with poor protection for workers. This meant countries which made it easier and cheaper to fire workers had a higher ranking than those that protected workers. It was for this reason that the World Bank’s Employing Workers Index was challenged by the international workers’ groups led by the International Trade Union Confederation and the International Labour Organisation, the chief complaint being that the EWI had a bias towards deregulation of the labour market and that it was being used to pressurise developing countries to reduce protection for workers. The World Bank eventually changed it, under pressure from the activists and committed to produce an index that promoted the letter and spirit of the ILO Conventions.

Overall, it is important to appreciate that indicators do not always have the objectivity that is claimed by their producers and proponents. They can be subject to biases and agendas promoting the ideologies and world-view of their producers. Thus while notions like “economic stability” are often presented as objective and value-free, in reality, they reflect the theoretical and ideological beliefs as to what is good for “economic stability”.

Hierarchies of power

Having explained indicators as a technology of global governance which has an impact on states, their agencies and populations it must be remembered that the vast majority, if not all, producers of these influential indicators are located in the developed world. This already locates the power generated by indicators in the developed countries, with developing countries often at the other end, as the assessed. If indicators produce governors who are mostly in the developed world, then they also produce the governed who are largely in the developing world. It may well be that at law all countries enjoy equal status, but clearly indicators generate rankings which are influential.

The complex structure that results from the influence of indicators and their impact on power relations is aptly captured by Nguyen, “… indicators have the power to create a hierarchy of authority and networks that otherwise might not have existed. As they gain popularity, indicators enhance the “governor” position of index producers, which, in turn, involves a wide range of actors: donors who fund the projects; consultants, economists, and statisticians who determine the technical authority of indicators; governmental agencies and individuals who coordinate the project; and, often in the final stage, international and governmental entities who give indicators their brand names”. It is easy, however, in an analysis of power which centres on the traditional state to overlook these hierarchies of power that are produced by indicators as technologies of governance.

What is the point of all this? Our understanding of power dynamics in our countries be it Zimbabwe, South Africa or Kenya will be incomplete without appreciating these hierarchies of power arising from technologies of governance such as indicators and networks. We will see this more clearly in our analysis of credit rating agencies, the indicators their produce and their position as governors.

Credit-rating as a technology of governance

The stage is now set to analyse credit rating as a technology of governance. Credit-rating is one of the important features of the capital markets. Lenders want to know the credit worthiness of those applying to borrow from them. Usually, they rely on a third party to perform the assessment. Credit-rating agencies perform this role. Their business is to carry out evaluations of creditworthiness of different units – it could be states, companies, individuals or assets. When a state, a company or an individual wants to borrow money from a financial institution, the latter relies on the credit-rating in their deciding whether or not to lend and if so, at what rates of interest. Those with poor credit-rating are unlikely to get loans but if they do, it is likely to be at a higher cost in terms of interest charges.

In his work on credit-rating agencies, Jon Oster has described a number of roles that they play in the capital markets. They provide an informational role by reducing the information asymmetries between lenders and borrowers or between issuers and purchasers of debt instruments. This means users do not have to spend too much time and money searching for and making sense of complex data which would also raise transaction costs.

They also serve a regulatory function since investors religiously rely upon credit-ratings in their decision-making processes. Depending on the rating, it can open or close doors of financial markets to the rated actors. Credit ratings can also work as marketing instruments for borrowers or issuers of debt instruments such as bonds such as states or companies. Since credit ratings are relied upon by lenders or purchasers of debt instruments, they effectively serve as certifications of the creditworthiness of a state or company or assets. Therefore, a good credit-rating serves as a good advertisement for the rated state or company, but conversely, a poor credit-rating can harm their reputation and raise the cost of capital.

Credit ratings as indicators

Credit ratings therefore fit into the scope of indicators and the credit rating agencies constitute an important part of the regime of global governance. By generating indicators on the credit-worthiness of states, companies and debt instruments on the capital markets, credit rating agencies perform an important role as “governors”. The states, companies, institutions and individuals that are rated form the constituency of the “governed”. Users of these credit ratings, such as lenders, national regulators and sometimes politicians are also part of this broad constituency of the governed. What is critical here is to appreciate that credit rating agencies wield enormous power in the arena of global governance, which extends beyond the economic sphere into the political. States and companies are under pressure to maintain good credit ratings or to improve them.

In the case of states, it means political authorities must keep an eye on the requirements that help to maintain good credit ratings or to improve them. However, credit rating agencies have their criteria for measuring credit-worthiness. In order to perform well on the ratings, states would have to comply with the criteria that is designed and determined by these private actors whose accountability remains an issue of contention. Can a country that seeks to go down a revolutionary path, which would radically transform the economy survive credit ratings? This is unlikely. Such a path would be unlikely to be consistent with the criteria that credit rating agencies use in their ratings. To that extent, as technology of governance, credit ratings keep political authorities in check or punish them should they deviate from what is considered good. A state that wants to avoid downgrading would have to avoid any revolutionary ideas. But this would also mean not attending to its promises or local grievances.

Problems with credit rating agencies and credit ratings

The global financial crisis between 2007 and 2009 exposed credit rating agencies. Their reliability, objectivity and transparency were called into question. It has been widely recognised in the wake of the global financial crisis that credit rating agencies had a significant role in the events that led to that crisis. Their major shortcoming was that they underestimated the risks in the financial instruments that they rated. It was those instruments and products that were at the centre of the first major financial crisis of the 21st century. The crisis also demonstrated key weaknesses in the way credit rating agencies performed their role.

The credit rating market is also oligopolistic. The three major firms, Standard & Poor, Moody’s and Fitch control more than 80 per cent of the market. This means there is very little competition between these firms.

A second major problem is that they are exposed to conflicts of interest as the firms that they rate are often the same firms that also pay them. They end up working with the rated firm or even advising it on how to get a better rating.

Third, there is no transparency in their operations and fourth, the methods used by credit rating agencies were exposed by the financial crisis[MC1] . Their ratings were found to be poor and misleading. These same challenges that were identified then could also be ascribed to how they rate countries with distinctly different circumstances and different sets of problems and priorities. A country that tries to deal with legacy issues might have to sacrifice some of the rules held dear according the rating agencies but this will affect credit rating.

These and other challenges have meant that confidence in credit rating agencies and their ratings took a huge knock in the wake of the global financial crisis. Part of the problem is that credit rating agencies were not subject to serious regulation and they were left to their own devices. This was a period of market fundamentalism, where so-called light-touch regulatory approach was favoured ahead of tougher scrutiny by regulators. Since the crisis, there have been moves to start to regulate the activities of credit rating agencies but as with all regulation in formerly self-regulating markets, old habits die hard and change will take some time. The major credit rating agencies were given stiff financial penalties by law enforcement agencies. In January 2017, one of the credit rating agencies, Moody’s agreed to pay fines of up to $864 million to US federal and state authorities over its failures in rating risky mortgage securities in the build-up to the global financial crisis.  Back in 2015, Standard & Poor, the biggest credit rating agency also settled for $1,375 billion with US authorities.

Against this background, it is important that when viewed through the prism of indicators and a technology of governance, credit ratings must be subjected to greater scrutiny than is often given to them in our countries. They are not beyond reproach. Their methods must be scrutinised to gauge whether they take into account both nuance and context.

The issue of theoretical or ideological bias that we observed in the general discussion on indicators assumes great importance in the context of credit ratings. As an indicator, credit ratings are not free of ideological bias. They operate on the basis of certain underlying theoretical assumptions which inform what qualifies as good enough for a favourable credit rating. In the case of sovereign credit ratings, if a state takes a political or economic direction that is at odds with the theoretical and ideological underpinnings that inform producers of credit ratings, it is likely that their credit ratings will fall. There have been two major downgradings in the past 12 months, both coming soon after major political decisions deemed to have major economic implications. The first was the downgrading of the United Kingdom’s credit rating after Brexit and the second was the recent downgrading of South Africa’s credit rating after a Cabinet reshuffle which included the sacking of the Minister of Finance.


The purpose of this analysis was to demonstrate how indicators and credit ratings are influential as technologies of global governance. To do so, I started by defining global governance and explaining the role of indicators as a technology of global governance. It was against that background that I analysed credit ratings as a specific indicator that plays an important role in global governance. I hope the article has given insight into the complex world of global governance and helps to demonstrate some of the not so obvious technologies by which we are governed. When most people ask how we are governed, they look to the state and international organisations. They rarely consider the subtle technologies and even private actors that play an important role in global governance. Credit rating agencies are right at the centre of it, playing a critical role in both economic and political governance.

I have deliberately avoided a debate on whether the downgrading of South Africa was warranted. It most probably was, given that it was already teetering on the brink for a long period before the downgrade. It was interesting that the downgrading happened immediately after the political decision to reshuffle the cabinet and sack the Finance Minister, suggesting that it was a response to the political decision. As a governor, Standard & Poor and later Fitch, had shown through their indicators, their disapproval of President Zuma’s decision.

The media plays an important role in the dissemination of indicators, raising alarm when indicators reflect poorly on a country or a company and conversely, glossing over inherent problems when the ratings are good, as happened before the global financial crisis – few questioned credit rating agencies. Even though they were clearly wrong, their views were taken as the gospel truth. From an economic viewpoint a good sovereign credit rating suggests that the government is doing well, never mind that there may be deep and intractable generational challenges facing its population. Thus, while South Africa had a good credit rating for a number of years, suggesting that it was doing well, the deep historical inequalities remained largely unresolved. South Africa was doing well in the eyes of credit rating agencies as reflected by positive credit ratings, but at the same time, the same could not be said in the eyes of the poor black majority who remained outside the mainstream economy and poor. Rating agencies place a higher premium on property rights than they do on the plight of the poor and marginalised.

What then should countries do? Pay attention to credit rating agencies to ensure good credit ratings or attend to hard issues which could lead to junk status? This is a challenge that many post-colonial states have had to face.

 [MC1]Reads strangely because it seems like a repetition of the paragraph that starts with “The global financial”