Beyond gdp: Proposing an investment reliability and stability index (IRSI)
By R.A.U. Juchter van Bergen Quast | September 5, 2025
Abstract
Gross Domestic Product (GDP) has long been the primary metric for gauging a nation’s economic health. However, for the discerning investor, GDP is a dangerously incomplete indicator. It quantifies economic output but reveals little about the underlying stability, legal protections, and macroeconomic consistency that are critical for assessing investment risk and the reliability of returns. This paper argues for a more nuanced metric, the Investment Reliability and Stability Index (IRSI). The IRSI is a composite index designed to provide a holistic view of a country’s investment climate by integrating measures of political stability, legal framework strength, macroeconomic consistency, and currency reliability. Through this multi-faceted approach, the IRSI aims to offer a more robust tool for international capital allocation and risk management.
The gdp problem: A mismatch of scale and substance
A nation’s GDP is a powerful number, representing the total monetary value of all goods and services produced over a specific time period. It’s often used as a proxy for national strength and economic prowess. The chart below shows the world’s largest economies by this metric, a leaderboard that shapes global narratives and initial investment screenings. However, a high GDP figure can mask significant underlying risks for investors.
The core issue is that GDP is an output metric, not a risk metric. It tells us the size of the economic engine but nothing about its maintenance, the quality of its parts, or the predictability of its performance. For an investor, the following questions are paramount, yet GDP provides no answers:
- Is the government stable? High GDP growth can be quickly erased by political turmoil, expropriation, or sudden regulatory shifts. Political stability is the bedrock of long-term investment.
- Are my assets protected? A strong, independent judiciary and robust property rights are essential. Without a reliable legal framework that enforces contracts, investments are built on sand.
- Is the economy managed predictably? Wild swings in inflation, interest rates, or economic policy create an unpredictable environment that complicates financial planning and jeopardizes the return of capital, let alone the return on capital.
The investment reliability and stability index (IRSI)
To address the shortcomings of GDP, we propose the IRSI. This index is not meant to replace GDP, but to complement it, providing the qualitative and risk-based context that GDP lacks. The IRSI is calculated as a weighted average of four equally important sub-indices, each scored on a scale of 0 to 100.
IRSI = 0.25 * PS + 0.25 * LF + 0.25 * MC + 0.25 * CR
1. Political stability (PS)
Measures the likelihood of political instability and/or politically-motivated violence. It draws upon data regarding government stability, internal and external conflicts, and ethnic tensions. A high score indicates a stable political environment conducive to long-term planning.
PS = Normalize(WGI_{PV})
Where WGI_{PV} is the “Political Stability and Absence of Violence/Terrorism” estimate from the Worldwide Governance Indicators (1).
2. Legal framework strength (LF)
Assesses the quality of contract enforcement, property rights, the police, and the courts. It is a direct measure of investor protection. A high score signifies a country where the rule of law is strong and legal recourse is reliable.
LF = Normalize(WGI_{RL})
Where WGI_{RL} is the “Rule of Law” estimate from the Worldwide Governance Indicators (1).
3. Macroeconomic consistency (MC)
This component evaluates the predictability of the macroeconomic environment. It penalizes high volatility in key indicators. A stable, consistent economy allows for more accurate forecasting and risk assessment.
MC = (1 – (w_i * \sigma_{inflation} + w_g * \sigma_{gdp\_growth})) * 100
Where \sigma represents the normalized standard deviation of annual inflation and GDP growth over a 5-year period, and w represents their respective weights.
4. Currency reliability (CR)
For international investors, returns must eventually be repatriated. This sub-index measures the stability of the national currency against a basket of major world currencies (e.g., USD, EUR). High volatility erodes returns and increases hedging costs.
CR = (1 – \sigma_{exchange\_rate}) * 100
Where \sigma_{exchange\_rate} is the normalized standard deviation of the currency’s exchange rate against a reference basket over a 3-year period.
Interactive irsi explorer
The true value of the IRSI lies in its ability to paint a multi-dimensional picture. A country might have a high GDP but score poorly on Legal Framework Strength, representing a significant hidden risk. Conversely, a smaller economy might have an outstanding IRSI score, making it a potentially safer investment. Use the dropdown below to explore hypothetical IRSI profiles for a selection of countries. This tool demonstrates how the index can reveal underlying strengths and weaknesses that a single GDP figure cannot.
Conclusion: A call for better instruments
In an increasingly complex and interconnected global economy, relying on a single, century-old metric like GDP for sophisticated investment decisions is insufficient. It is an instrument of the right type (a measurement) but of the wrong precision and scope. It captures economic quantity but not investment quality.
The Investment Reliability and Stability Index (IRSI) provides a necessary layer of analysis, focusing on the structural factors that ensure the safety of capital and the reliability of returns. By systematically evaluating political stability, legal protections, and macroeconomic consistency, the IRSI can help investors differentiate between economies that are merely large and those that are truly robust. Adopting such multi-faceted indicators is a critical step towards more prudent and sustainable international investment strategies.
References
(1) Kaufmann, D., Kraay, A., & Mastruzzi, M. (2010). The Worldwide Governance Indicators: Methodology and Analytical Issues. World Bank Policy Research Working Paper No. 5430. Washington, DC: World Bank.
(2) International Monetary Fund. (2025). Global Financial Stability Report. Washington, DC: IMF.
(3) North, D. C. (1990). Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press.