Hostname: page-component-76fb5796d-dfsvx Total loading time: 0 Render date: 2024-04-25T12:48:47.416Z Has data issue: false hasContentIssue false
  • English
  • Français

Sovereign Debt and Regime Type: Reconsidering the Democratic Advantage

Published online by Cambridge University Press:  10 October 2012

Emily Beaulieu ,
Gary W. Cox  and
Sebastian Saiegh
Emily Beaulieu
Affiliation:
University of Kentucky, Lexington. E-mail: emily.beaulieu@uky.edu
Gary W. Cox
Affiliation:
Stanford University, Palo Alto, Calif. E-mail: gwcox@stanford.edu
Sebastian Saiegh
Affiliation:
University of California, San Diego. E-mail: ssaiegh@ucsd.edu
Get access

Abstract

The literature exploiting historical data generally supports the democratic advantage thesis, which holds that democracies can sell more bonds on better terms than their authoritarian counterparts. However, studies of more recent—and extensive—data sets find that democracies have received no more favorable bond ratings from credit rating agencies than otherwise similar autocracies; and have been no less prone to default. These findings raise the question: where is the democratic advantage? Our answer is that previous assessments of the democratic advantage have typically (1) ignored the democratic advantage in credit access; (2) failed to account for selection effects; and (3) treated GDP per capita as an exogenous variable, ignoring the many arguments that suggest economic development is endogenous to political institutions. We develop an estimator of how regime type affects credit access and credit ratings analogous to the “reservation wage” model of labor supply and treat GDP per capita as an endogenous variable. Our findings indicate that the democratic advantage in the postwar era has two components: first, better access to credit (most autocracies cannot even enter the international bond markets); and second, better ratings, once propensity to enter the market is controlled and GDP per capita is endogenized.

Type
Research Article
Information
International Organization , Volume 66 , Issue 4 , October 2012 , pp. 709 - 738
Copyright
Copyright © The IO Foundation 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Acemoglu, Daron, Johnson, Simon, and Robinson, James A.. 2001. The Colonial Origins of Comparative Development: An Empirical Investigation. American Economic Review 91 (5):1369–401.CrossRefGoogle Scholar
Acemoglu, Daron, Johnson, Simon, and Robinson, James A.. 2005. Institutions as the Fundamental Cause of Long-Run Economic Growth. In Handbook of Economic Growth, edited by Aghion, Philippe and Durlauf, Stephen N., 385–472. Amsterdam: Elsevier.Google Scholar
Albouy, David Y. 2008. The Colonial Origins of Comparative Development: An Investigation of the Settler Mortality Data. Working Paper 14130. Cambridge, Mass.: National Bureau of Economic Research. Available at ⟨http://www.nber.org/papers/w14130⟩. Accessed 29 June 2012.Google Scholar
Angrist, Joshua D., and Pischke, Jörn-Steffen. 2009. Mostly Harmless Econometrics: An Empiricist's Companion. Princeton, N.J.: Princeton University Press.CrossRefGoogle Scholar
Archer, Candace C., Biglaiser, Glen, and DeRouen, Karl Jr. 2007. Sovereign Bonds and the “Democratic Advantage”: Does Regime Type Affect Credit Rating Agency Ratings in the Developing World? International Organization 61 (2):341–65.CrossRefGoogle Scholar
Barbieri, Katherine, and Keshk, Omar. 2008. Correlates of War Project Trade Data Set Codebook, Version 2.01. Available at ⟨http://correlatesofwar.org⟩. Accessed 29 June 2012.Google Scholar
Beck, Nathaniel, Katz, Jonathan N., and Tucker, Richard. 1998. Taking Time Seriously: Time-Series-Cross-Section Analysis with a Binary Dependent Variable. American Journal of Political Science 42 (4):1260–88.CrossRefGoogle Scholar
Buis, Maarten L. 2011. Stata Tip 97: Getting at ρ's and σ's. Stata Journal 11 (2):315–17.CrossRefGoogle Scholar
Cantor, Richard, and Packer, Frank. 1996. Determinants and Impact of Sovereign Credit Ratings. Economic Policy Review 2 (2):37–53.Google Scholar
Cheibub, José Antonio, Gandhi, Jennifer, and Vreeland, James. 2010. Democracy and Dictatorship Revisited. Public Choice 143 (1-2):67–101.CrossRefGoogle Scholar
Cox, Gary W. 2011. Sovereign Debt, Political Stability and Bargaining Efficiency. Unpublished manuscript. Stanford University, Stanford, Calif.Google Scholar
Das, Dilip K. 2006. Globalization in the World of Finance: An Analytical History. Global Economy Journal 6 (1):1–22.CrossRefGoogle Scholar
Dincecco, Mark. 2009. Fiscal Centralization, Limited Government, and Public Revenues in Europe, 1650–1913. Journal of Economic History 69 (1):48–103.CrossRefGoogle Scholar
Eichengreen, Barry, and Mody, Ashoka. 1998. What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment? Working Paper 6408. Cambridge, Mass.: National Bureau of Economic Research. Available at ⟨http://www.nber.org/papers/w6408⟩. Accessed 29 June 2012.Google Scholar
Ferguson, Niall. 1998. The World's Banker: The History of the House of Rothschild. London: Weidenfeld and Nicholson.Google Scholar
Flandreau, Marc, and Flores, Juan H.. 2009. Bonds and Brands: Foundations of Sovereign Debt Markets, 1820–1830. Journal of Economic History 69 (3):646–84.CrossRefGoogle Scholar
Gaillard, Norbert. 2009. Fitch, Moody's and S&P's Sovereign Ratings and EMBI Global Spreads: Lessons from 1993–2007. International Research Journal of Finance and Economics 26:41–59.Google Scholar
Ghosh, Parikshit, Mookherjee, Dilip, and Ray, Debraj. 2001. Credit Rationing in Developing Countries: An Overview of the Theory. In Readings in the Theory of Economic Development, edited by Mookherjee, Dilip and Ray, Debraj, 283–301. Oxford, UK: Blackwell.Google Scholar
Greene, William H. 1993. Econometric Analysis. Upper Saddle River, N.J.: Prentice Hall.Google Scholar
Häusler, Gerd. 2002. The Globalization of Finance. Finance and Development 39 (1):10–12.Google Scholar
Heckman, James J. 1979. Sample Selection Bias as a Specification Error. Econometrica 47 (1):153–62.CrossRefGoogle Scholar
Hoti, Suhejla, and McAleer, Michael. 2004. An Empirical Assessment of Country Risk Ratings and Associated Models. Journal of Economic Surveys 18 (4):539–88.CrossRefGoogle Scholar
Jaeger, Manfred. 2005. Ignorability in Statistical and Probabilistic Inference. Journal of Artificial Intelligence Research 24:889–917.CrossRefGoogle Scholar
Jensen, Nathan M. 2003. Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment. International Organization 57 (3):587–616.CrossRefGoogle Scholar
Keefer, Philip. 2009. DPI2009. Database of Political Institutions: Changes and Variable Definitions. Washington, D.C.: World Bank. Available at ⟨http://siteresources.worldbank.org/INTRES/Resources/469232-1107449512766/DPI2009_variable_definitions.pdf⟩. Accessed 29 June 2012.Google Scholar
Lambert, Paul C., Smith, Lucy K., Jones, David R., and Botha, Johannes L.. 2005. Additive and Multiplicative Covariate Regression Models for Relative Survival Incorporating Fractional Polynomials for Time-Dependent Effects. Statistics in Medicine 24 (24):3871–85.CrossRefGoogle ScholarPubMed
Li, Quan, and Resnick, Adam. 2003. Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries. International Organization 57 (1):175–211.CrossRefGoogle Scholar
Mauro, Paolo, Sussman, Nathan, and Yafeh, Yishay. 2006. Emerging Markets and Financial Globalization: Sovereign Bond Spreads in 1870–1913 and Today. Oxford, UK: Oxford University Press.CrossRefGoogle Scholar
North, Douglass C., and Thomas, Robert P.. 1973. The Rise of the Western World. New York: Cambridge University Press.CrossRefGoogle Scholar
North, Douglass C., and Weingast, Barry R.. 1989. Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England. Journal of Economic History 49 (4):803–32.CrossRefGoogle Scholar
North, Douglass C., Wallis, John Joseph, Weingast, Barry R.. 2009. Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History. New York: Cambridge University Press.CrossRefGoogle Scholar
Papaioannou, Elias, and Siourounis, Gregorios. 2008. Democratisation and Growth. Economic Journal 118 (532):1520–51.CrossRefGoogle Scholar
Persson, Torsten, and Tabellini, Guido. 2006. Democracy and Development: The Devil in the Details. American Economic Review 96 (2):319–24.CrossRefGoogle Scholar
Polanyi, Karl. 1944. The Great Transformation. Boston: Beacon Press.Google Scholar
Przeworski, Adam, Alvarez, Michael, Cheibub, José Antonio, and Limongi, Fernando. 2000. Democracy and Development. Political Institutions and Well-Being in the World, 1950–1990. New York: Cambridge University Press.CrossRefGoogle Scholar
Reinhart, Carmen M. 2010. This Time Is Different Chartbook: Country Histories on Debt, Default, and Financial Crises. Working Paper 15815. Cambridge, Mass.: National Bureau of Economic Research. Available at ⟨http://www.nber.org/papers/w15815⟩. Accessed 29 June 2012.Google Scholar
Reinhart, Carmen M., and Rogoff, Kenneth S.. 2010. From Financial Crash to Debt Crisis. Working Paper 15795. Cambridge, Mass.: National Bureau of Economic Research. Available at ⟨http://www.nber.org/papers/w15795⟩. Accessed 29 June 2012.Google Scholar
Robinson, James A. 2006. Debt Repudiation and Risk Premia: The North-Weingast Thesis Revisited. Unpublished manuscript. Harvard University, Cambridge, Mass.Google Scholar
Rodrik, Dani. 1997. Has Globalization Gone Too Far? Washington, D.C.: Institute for International Economics.CrossRefGoogle Scholar
Royston, Patrick, and Altman, Douglas G.. 1994. Regression Using Fractional Polynomials of Continuous Covariates: Parsimonious Parametric Modelling. Applied Statistics 43 (3):429–67.CrossRefGoogle Scholar
Rudra, Nita. 2002. Globalization and the Decline of the Welfare State in Less-Developed Countries. International Organization 56 (2):411–45.CrossRefGoogle Scholar
Rudra, Nita, and Haggard, Stephan. 2005. Globalization, Democracy, and Effective Welfare Spending in the Developing World. Comparative Political Studies 38 (9):1015–49.CrossRefGoogle Scholar
Saiegh, Sebastian M. 2005. Do Countries Have a “Democratic Advantage”? Political Institutions, Multilateral Agencies, and Sovereign Borrowing. Comparative Political Studies 38 (4):366–87.CrossRefGoogle Scholar
Saiegh, Sebastian M. 2009a. Coalition Governments and Sovereign Debt Crises. Economics and Politics 21 (2):232–54.CrossRefGoogle Scholar
Saiegh, Sebastian M. 2009b. Political Institutions and Sovereign Borrowing: Evidence from Nineteenth-Century Argentina. Paper presented at the 13th Annual Meeting of the International Society for New Institutional Economics, June, Berkeley, Calif.CrossRefGoogle Scholar
Sartori, Anne E. 2003. An Estimator for Some Binary-Outcome Selection Models Without Exclusion Restrictions. Political Analysis 11 (2):111–38.CrossRefGoogle Scholar
Schultz, Kenneth A., and Weingast, Barry R.. 2003. The Democratic Advantage: Institutional Foundations of Financial Power in International Competition. International Organization 57 (1):3–42.CrossRefGoogle Scholar
Sinclair, David. 2003. The Land That Never Was: Sir Gregor MacGregor and the Most Audacious Fraud in History. Cambridge, Mass.: Da Capo Press.Google Scholar
Sinclair, Timothy J. 2003. Global Monitor: Bond Rating Agencies. New Political Economy 8 (1):147–61.Google Scholar
Sinclair, Timothy J. 2005. The New Masters of Capital: American Bond Rating Agencies and the Politics of Creditworthiness. Ithaca, N.Y.: Cornell University Press.Google Scholar
Stasavage, David. 2003. Public Debt and the Birth of the Democratic State: France and Great Britain, 1688–1789. Cambridge, UK: Cambridge University Press.CrossRefGoogle Scholar
Stasavage, David. 2007. Cities, Constitutions, and Sovereign Borrowing in Europe, 1274–1785. International Organization 61 (3):489–525.CrossRefGoogle Scholar
Stasavage, David. 2011. States of Credit: Size, Power, and the Development of European Polities. Princeton, N.J.: Princeton University Press.Google Scholar
Sturzenegger, Federico, and Zettelmeier, Jeromin. 2006. Debt Defaults and Lessons from a Decade of Crises. Cambridge, Mass.: MIT Press.Google Scholar
Summerhill, William R. 2006. Sovereign Commitment and Financial Underdevelopment in Imperial Brazil. Unpublished manuscript. University of California, Los Angeles.Google Scholar
Suter, Christian. 1992. Debt Cycles in the World-Economy: Foreign Loans, Financial Crises, and Debt Settlements, 1820–1990. Boulder, Colo.: Westview Press.Google Scholar
Tomz, Michael. 2007. Reputation and International Cooperation: Sovereign Debt Across Three Centuries. Princeton, N.J.: Princeton University Press.Google Scholar
Torres, Gabriel, and Zelter, Jill. 1998. Rating Securitizations Above the Sovereign Ceiling. FitchIBCA Report, December 29. Available at ⟨http://www.securitization.net/pdf/sec_ceiling.pdf⟩. Accessed 29 June 2012.Google Scholar
Vaaler, Paul M., and McNamera, Gerry. 2004. Note on Agencies and the Sovereign Rating Industry. International Business Relations Case Program, Fletcher School of Law and Diplomacy, Tufts University, Medford, Mass. No. FLD-EIB B231-RN001.Google Scholar
World Bank. 2010. World Development Indicators 2010. Washington, D.C.: World Bank. Available at ⟨http://data.worldbank.org/data-catalog/world-development-indicators/wdi-2010⟩. Accessed 29 June 2012.Google Scholar