DEMOCRATIC THREATS
REGIME TYPE AND SOVEREIGN DEBT CRISIS RESOLUTION
Henrik Enderlein, Laura Müller, and Christoph Trebesch1 Hertie School of Governance
Paper to be presented at the IPES-Conference in Philadelphia,
November 14-15, 2008
Second Draft
Please do not cite or quote without permission.
Comments welcome!
Abstract
This paper analyzes government behavior in sovereign debt crises between 1980 and 2004. We
test the relationship between regime type and crisis management on a new data set of government
behavior during crises. Looking at distress episodes in 31 emerging countries, we find that
democratic debtors differ significantly from non-democratic sovereigns. Democracies generally
take a more aggressive stance towards lenders in economic crisis than autocracies. Aggressive
government behavior increases with the level of democracy. Finally, more experienced
democracies show more coercive behavior than recently democratized debtors. The results hold
across tests with different democracy indicators and using different estimation techniques.
1
The authors gratefully acknowledge financial support of the German Research Foundation (DFG) under the Special
Research Area 700 on Governance in Areas of Limited Statehood (www.sfb-governance.de). We thank Alexander
Agronovsky, Henrik Maihack and Said-Khalid Scharaf for excellent research assistance in preparing this draft. We are
also grateful to Sebastian Saiegh for sharing data.
1. Introduction
The paper is concerned with a crucial type of international economic relations – sovereign
borrowing.2 Since the 1980s the role of private-to-public lending has increasingly been gaining
importance. As emerging countries continue to rely heavily on access to private capital markets
one would expect their governments to be interested in good relations with financial market
participants. Why then, do we still see aggressive policies towards international creditors during
financial crises as in Argentina in 2001? In the paper we try to answer this and a set of related
questions. The main goal is to test if differences in debtor behavior can explained by domestic
institutions. Going back to a large literature on macroeconomic policy making outlined below,
we find very compelling arguments on how regime type could affect economic outcomes and
economic policy making in emerging countries undergoing political transition. However, to this
date the empirical evidence concerning the effect of democracy remains largely inconclusive. The
literature on the institutional origins of economic performance and policies is far too voluminous
to summarize adequately in this paper. Important, albeit partly contradicting, recent contributions
are provided by Barro (1996), Hall and Jones (1999), Przeworski et al. (2000), Acemoglu et al.
(2001), Glaeser et al. (2004), and Epstein et al. (2006). Likewise, it remains an open question if
democratic institutions increase debtor compliance with international debt contracts or not.
To gain a more systematic understanding of the actual policy choices we study sovereign
debt crises between 1980 and 2004 in 31 emerging economies. Specifically, we aim to explain
policy choices with regard to external private creditors. We thereby contribute to what Panizza et
al. (2008: 41) in a new review of the sovereign debt literature call the study of “private incentives
of policymakers to default or fight a crisis.” As we argue here, those private incentives - to stay in
2
Sovereign debt is commonly defined as the total outstanding financial liabilities of a country, including all public
and publicly guaranteed debt incurred by other debtors, denoted in foreign and local currency. We focus on the part of
sovereign debt owed to external private actors. This is the standard definition of external Sovereign Debt used by the
rating agency Standard and Poors (S&P) which is employed in most of the literature.
1
power - are likely to depend on the regime type of the debtor, i.e. whether it is democratic or
autocratic.
We try to contribute to a more nuanced discussion on sovereign debt crises introducing a
newly coded index of government behavior that captures the degree of unilateral, noncooperative policies imposed on creditors in sovereign default situations and in the run-up to debt
restructuring agreements. By and large, previous empirical tests of the role of various economic
and institutional factors in default relied on a simple binary definition of default versus nondefault. Although useful for a number of research questions the binary definition fails to display
the variation in policy choices falling under this definition. It gives no account of the variation in
government behavior towards private creditors.
Sovereigns over the last decades have, however, approached their creditors in very
different ways during crises, reaching from low key and conformable behavior to outright
repudiation of debt and arrogance on the side of government officials. A comparison between an
autocracy like Romania and a democracy like Peru in the early 1980s illustrates this point. The
totalitarian Romanian government from 1980 onwards, imposed extremely high costs of
continued debt service on the population to convince creditors of its continued willingness to
repay their debt. Expenditures were cut to a minimum. At the peak of the crisis during the winter
of 1985 Romanian President Nicolae Ceaucescu put a ban on use of private vehicles and ordered
drastic limitations on citizens’ use of light and heating. 3
In stark contrast, Peru – after initial attempts to implement austerity had failed – declared
a unilateral debt ceiling on its external debt servicing in June 1985 (Financial Times on 29 June,
3
At the same time when power supply was cut short, debt payments to external creditors continued (WSJ, 20 Dec.
1985, FT, 15 July 1986, WSJ, 24 July 1986). Despite rising poverty rates and chronic foot shortages Ceausescu
continued to follow his drastic policy of debt reduction through 1987 (FT, 17 Nov. 1987, FT, 24 April 1987 FT, 20
Nov. 1987).
2
1985). After years of democratic transition with political turmoil, failed IMF programs and
frequent general strikes, newly elected President Alan Garcia opted for a very different set of
debt policies than the Romanian government at the time..
Another striking example of the importance of domestic political pressures on democratic
leaders is the situation in Argentina in December of 2001 and in the following years. After a three
year-period of economic recession and political deadlock, the government of Argentina declared
a complete halt on all external debt payments in one of the most prominent cases of unilateral
default in recent history. It is without question that mass protests of the population were a major
factor in the decision to declare a default.
The empirical analysis yields several important insights on what explains this variability
in debt crisis handling. First of all, looking at the distribution of our “Index of Government
Behavior” we find that the degree of aggressiveness of debtors during sovereign debt crises is
relatively constant over time. We found no evidence that governments behaved significantly
more or less aggressively towards their private creditors in the era of syndicated bank lending of
the 1980s as compared to the Post-Brady-Deal-Era characterized by highly dispersed bond
holders.
As concerns the determinants of government behavior, there are three main results: First,
evidence shows that democratic leaders applied significantly more coercive debt policies towards
creditors on average.4 Second, the ability to take an aggressive stance towards creditors increases
significantly with the level of democracy as reported by the Polity index. Third, looking only at
the sub-sample of democratic countries in our data we find that years of democratic experience
seem to explain differences in debtor behavior among democratic governments. Countries with
4
In various test using the standard S&P-default indicator as dependent variable we also find a significant positive
effect of democracy on the likelihood of a default.
3
more than five years of democratic experience turn out to be significantly more aggressive
towards external creditors. We ascribe this outcome to the fact that voters in democratic systems
are generally in a better position to force their governments into aggressive external debt policies.
The remainder of the paper is structured as follows: Section 2 presents the related
literature on sovereign default and government behavior in external crisis while Section 3 departs
from the literature to develop the theoretical foundations of our argument and provide testable
hypotheses. Section 4 presents our new indicator, the “Index of Government Behavior” which is
followed by a brief presentation of stylized facts and descriptives on democracies in default
(Section 5). In Section 6 we describe regression techniques, data sources and variables. Results
are discussed in Section 7, followed by concluding remarks (Section 8).
2. What are Sovereign Defaults? And what explains external debt policy decisions?
Concerned with explanations of government debt policies during financial distress this
section starts out with a brief discussion of the appropriate dependent variable to use (section
2.1). We then go on to discuss three different strands of literature relevant to our research
question: the macroeconomic literature on debt crises (section 2.2), institutional explanations of
default (2.3), and contributions concerned with the effects of democratic institutions on
macroeconomic policy making in newly democratized countries (2.4).
2.1 Measuring debt crises and default
To this date, the literature treated government choice mainly as a binary variable. Most
researchers employ a dummy default indicator based on data from Standard and Poor’s5 or from
5
The S&P definition of default takes into account any payments missed on scheduled bond debt, notes or bills and
on bank loan interest or principal (Standard & Poor’s 2006). Also, any exchange of new debt that contains less
4
the World Bank’s lists of restructuring events (World Bank 2002, 2003).6 Some researchers have
also combined these two key sources with additional data and definitions in an attempt to provide
more concise measures of debt crisis.7 Nevertheless, standard indicators of default applied in
most of the literature remain dichotomous variables. We find the dichotomy to be too
constraining and propose a more nuanced picture of the “choice of weapons” for governments in
crisis.
In fact, there is a large body of more qualitative accounts of sovereign default events since
1980 concerned with government behavior during crisis.8 They include attempts to categorize
different types of debt crises and government behavior during crises. Authors agree in that crises
vary on a spectrum from soft to hard or from voluntary to more involuntary cases (examples are
Aggarwal 1996, Cline 2004, Frankel and Roubini 2001, Roubini 2004 and Roubini and Setser
2004). Cline (2004) and Roubini (2004) are particularly concerned with the categorization of past
crises as a function of the degree of private sector burden sharing. In their approaches, cases vary
on a continuum between extremely friendly and very coercive cases.9 Inspired by these
favourable terms than the original bond issue and any rescheduling of principal and/or interest at less favourable terms
than indicated in the original contract counts as a default.
6
See e.g., Borensztein and Panizza (2006),Gelos, Sahay and Sandleris (2004), Manasse, Roubini and
Schimmelpfennig (2003), , Reinhart, Rogoff and Savastano (2003), van Rijckeghem and Weder (2004), and
Kohlscheen (2007)
7
As an example, Detraigache and Spilimbergo (2001) consider arrears of principal or interest towards commercial
creditors, while 2003 define a country in default whenever the S&P criterion holds or if it receives a large nonconcessional IMF loan meaning in excess of 100 % of quota. Pescatori and Sy (2007) suggested a further debt crisis
measure, which explicitly takes into account the increase in bond financing since the early 1990s. In addition to
default cases as of S&P they regard a country in severe financial distress, whenever the sovereign bond spread
surpasses a critical threshold, such as 1000 basis points above U.S. Treasuries. Lastly, authors such as Reinhart,
Rogoff, Savastano (2003), Gelos, Sahay and Sandleris (2004) and Fostel and Kaminsky (2007) have supplemented the
S&P list of defaults with information of the qualitative list of debt crises by Beim and Calomiris (2001: 32-36).
8
Historical accounts of sovereign debt crises going back into the past centuries of sovereign lending include
Stasavage (2007), Suter (1992), Tomz (2007a), Reinhart and Rogoff (2008b). See Cline (1995), Aggarwal (1996) and
Boughton (2001) for a discussion of 1980s debt crisis cases. Roubini and Setser (2004), Andritzky (2006) and
Sturzenegger and Zettelmeyer (2006) are mainly devoted to more recent cases of financial distress.
9
Also, Beim and Calomiris (2001) and Manasse, Roubini and Schimmelpfennig (2003) both hint at the variation of
debtor behavior reaching from “outright repudiation” or “outright default” to default in a more “conciliatory
fashion”.
5
approaches we create a categorical “Index of Government Behavior” which will be discussed in
detail in section 3.
2.2 Literature on macroeconomic determinants of sovereign default
Much of the literature in Economics has focused on the macroeconomic and financial
determinants of debt crises. Panizza, Sturzenegger and Zettelmeyer (2008) provide an
encompassing “history of economic thought” on sovereign debt covering the past 30 years of
research including theoretical and empirical contributions.
Recent empirical contributions identified a set of economic factors to be important
macroeconomic determinants of default (see, for example, Kraay and Nehru 2004, Manasse,
Roubini and Schimmelpfennig 2003 or Detraigache and Spilimbergo 2001). They include the
pre-crisis level of indebtedness, measures of liquidity, the level of output, trade openness and past
default history (see Reinhart and Rogoff 2008).10 Additionally, the presence of programs by the
IMF or other official rescue lending institutions can be important (a.o. Marchesi 2003 and
Roubini and Setser 2004).
2.3 Institutional explanations for default
There is still relatively little empirical work on the role of political and institutional
factors. In recent quantitative studies Manasse, Roubini and Schimmelpfennig (2003) and Kraay
and Nehru (2004) include a number of political and institutional factors in their analysis.11 Their
results indicate political economy variables to play a role in debt distress but the articles lack an
explanation why and how these variables matter in detail.
10
Reinhart, Rogoff and Savastano (2003) give an explanation how countries’ default history affects market
perceptions of the likelihood of default.
11
Other examples are Reinhart, Rogoff and Savastano 2003 or Detraigache and Spilimbergo 2001. For an overview
see also Hatchondo, Martinez and Sapriza (2007).
6
More in-depth studies on the role of institutions highlight the importance of regime type in
explaining differences in debt repayment behavior, however with inconclusive empirical results.
Schultz and Weingast (2003) set the stage for a deeper exploration of the effect of democratic
institutions on sovereign expropriation and sovereign default.12 In a widely quoted article they
find more liberal political systems to enjoy better borrowing conditions providing them with a
“democratic advantage”. Because liberal political institutions allow for credible commitments to
contracts, democracies are predicted to have a lower default risk, reflected in lower risk premia
on government bonds.13
Jensen (2003), van Rijckeghem and Weder (2004), Saiegh (2005), Kohlscheen (2007),
Stasavage (2007), Alichi (2008), and McGillivray and Smith (2008) also look at the effects of
regime type (democracies versus autocracies) in more detail.14 Their predictions, however, are
inconclusive. Saiegh (2005) and Alichi (2008) find democracies to have a higher likelihood of a
debt rescheduling and default. In contrast, Schultz and Weingast (2003), van Rijckeghem and
Weder (2004), McGillivray and Smith (2008), and Jensen (2003, 2008) conclude that
democracies have lower probabilities of default and lower country risk premia.15
12
Earlier contributions had already hinted at the possible relationship between democracy and default. However,
authors predicted the relationship to have different fore signs than Schultz and Weingast (2003). Kaufmann (1985),
sees democratic rule as a major driving force for explaining debt policies. In a similar vein, Frieden (1988) looks at
the interaction between government policy choice and private sector attitudes towards governments to explain debt
and other macroeconomic management in the 1980s Latin American Debt Crisis. He focusses on the labor - capital
relation in a country and finds the level of democracy has an important intervening function as it affects the capacity
to suppress demands from either interest group.
13
The hypothesis is based on an earlier argument by North and Weingast (1989) on the relationship between liberal
rule and the protection from expropriation in 17th Century England. The article predicted property rights to be more
respected in more liberal polities. The assumption of a positive causal effect of “checks” on the respect of property
rights and on borrowing terms in liberal political systems has been criticised by authors including Clark (1996),
Epstein (2000), Sussman and Yafeh (2006).
14
Kohlscheen (2007) gives further insights on democratic regimes. In his sample parliamentary democracies turn out
to default less often than presidential systems. The main reason seems to be the high responsiveness of parliamentary
systems to their constituency. .
15
The studies by Saiegh (2005) and Van Rijckeghem and Weder (2004) use different dependent variables and data
sources which makes comparison and interpretation a bit difficult. Saiegh (2005) uses 1999 data on private and public
external reschedulings and restructurings in 80 between 1971 to 1997. Van Rijckeghem and Weder (2004) test the
effect of democracy on domestic and external default, finding democracies to default less often on external debt then
7
Jensen (2003, 2008) argues that democratic leaders are more likely to respect property
rights. Not only do they expropriate less, their increased property rights stability and credible
commitment to international debt contracts is rewarded by lower default risk premia in capital
markets.
McGillivray and Smith (2008) conclude that systems ruled by larger winning
coalitions – which are highly correlated with democracies – are less likely to default on debt. The
main reason is that democratic leaders can be replaced more easily if they follow unpopular
policies.16 According to McGillivray and Smith (2008), the anticipation of a punishment effect is
what drives governments to cooperate with their creditors.17
On the more skeptic side of the “democratic advantage” debate are Saeigh (2005) and
Stasavage (2007). Saiegh (2005) states an important critique of the unconditionally positive
effect of democratic institutions. Looking at data for developing countries, he finds democracies
to have a higher propensity to reschedule than non-democracies and brings up two necessary
conditions for the democratic advantage-argument to hold. First, lenders would have to play an
important role in the domestic economy and be able to exert electoral power on the government.
Second, populations are not necessarily in favor of debt repayment at all times. Contrary to the
prediction of Schultz and Weingast (2003) creditors may not be represented in sufficient numbers
in the debtor country to deter contract breach. 18
Finally, Stasavage (2007) revisits the democratic advantage argument using historical data
on 27 European states between 1274 and 1765. In the article he provides evidence on a
significant impact of liberal institutions on states’ market access. However, what matters is
autocracies. They look at 73 low and middle income countries between 1970 and 2000 using annual data from S&P
for 2003 covering default on domestic and external debt denoted in foreign and local currency.
16
Authors base their analysis on work by Bueno de Mesquita et al. (2003) who studied conditions of political
survival of leaders in small versus large winning coalition systems.
17
In their analysis of changes in debtors’ credit worthiness in 70 countries between 1993 and 2003, McGillivray and
Smith (2008) use bond indices as dependent variables They also test their model on data for default rates as
measured by Standard&Poor’s between 1824 and 2003 and find similar results.
18
Saiegh derives this idea from a borrowing model by Drazen (1998). He claims that governments will not comply if
the median voter’s saving is less than the economy’s average (Saiegh 2005: 370).
8
apparently the interaction of institutions and the type of state – city state or territorial state.
While democratic institutions in city states have historically had great impact on borrowing
conditions, institutions were less decisive in territorial states.
2.4 Literature on macroeconomic policy decisions in new democracies
The “democratic advantage”-approach was noteworthy because it provided an explanation
why investors could prefer democracies to authoritarian regimes. In contrast, much of the earlier
literature on macroeconomic policy making in developing and emerging countries during the
1980s emphasized the relative advantage of authoritarian governments to grow economically and
attract capital. The main reason was seen in the ease with which autocratic leaders could suppress
popular demands for distributive policies for the sake of macroeconomic adjustment and
compliance with international business contracts (O’Donnell 1978, Kaufman 1986, Haggard and
Kaufman 1992 and 1995, Williamson and Haggard 1994).
Kaufmann (1985: 473) describes the situation at the onset of the 1980s Debt Crisis:
“[G]overnmental elites, if they remain in power, must also answer to (or repress)
their own populations. And the price to be paid for external help with ‘liquidity problems’
has typically involved politically dangerous stabilization measures (devaluations, wage
and credit restrictions, and fiscal deficit reductions) - measures that often arouse the
strong opposition of major social forces.”19
His main conclusion is that, faced with such political conflicts, autocratic regimes had
“apparent advantages” over completely elected governments. They could repress opposition from
19
In a similar vein, Frieden (1989:24) notes that foreign debt is often “a source of domestic political conflicts for it
can raise important distributional issues”.
9
unions and popularly based party organizations (Kaufman 1986:195). Furthermore executive
authorities could operate “outside a framework of institutionalized accountability”. From a
powerful position technocrats could thus promote policies “aimed at winning the general
‘confidence’ of local and international capital”. By and large, authors in the early 1990s agreed
that distributional pressures were reform-deterring in democracies.
Predictions were particularly gloomy for new democracies as a separate category of
regimes distinguished from autocratic regimes and from established democracies (Kaufman 1986,
Frieden 1989, Williamson and Haggard 1994, Haggard and Webb 1994, Haggard and Kaufman
1995). Nevertheless, the empirical ground for these negative predictions was relatively weak as
was shown in the methodological critique of the “conventional wisdom” by Stallings (2004) and
Remmer (1990) among others.20
Few authors found possible advantages of the newly created democratic systems although
Hirschman (1987) hints at one obvious advantage of new democracies. He ascribes new
democratic governments a “special reserve of trust and goodwill” allowing them to take
unpopular reform steps. Other authors have described this phenomenon as the “honeymoon
effect” (Haggard and Kaufman 1995 and Linz and Stepan 1996 a.o.). The high level of popularity
based in a high legitimacy provides new governments with the - temporary - freedom to
implement even the most comprehensive and painful adjustment policies (for an overview on the
debate see Bernard et al. 2001). Likewise, all responsibility for economic hardship and negative
consequences of necessary reforms can be blamed on the hated old regime (Stokes 2001).
Tomz (2002) provides a new approach which allows combining the opposing views on
the effect of democratic institutions on macroeconomic policymaking to some extent. He draws
20
In their view, the selection of only successful reform initiatives in autocratic systems and/or unsuccessful examples
of reform under democratic regimes lead early commentators of transition in Latin America, Southern Europe and
parts of Africa to undue generalizations. Unlike many of the earlier studies, authors found that chances for successful
reform implementation in new democracies were not completely off.
10
on audience cost theory to explain how changes in domestic preferences translate into external
policies. Like Kaufman (1985) and Frieden (1989) earlier, Tomz (2002) stresses the distributional
consequences of international agreements. Those parts of the population most negatively affected
by an international agreement can turn into “champions of noncompliance” (Tomz 2002: 2). In
good times, when the economic situation is stable, citizens in democracies are likely to take a
pro-market position and punish their government if it takes steps that are detrimental to the
reputation of the country (McGillivray and Smith 2008). However, as the economic situation
deteriorates, populations change their preferences. In the context of a debt crisis, this would lead
them to prefer default to hurtful domestic adjustments.21
Tomz’ argument that domestic audience costs are behind default decisions seems intuitive
but requires further testing. In the context of international debt negotiations audience cost theory
gives the whole story of coercive debt policy decisions by governments an important twist. One
could argue that the capacity to raise credible audience costs provides an incentive for democratic
governments to take a tough position towards external creditors.
Another central finding from audience cost theory is that democratic leaders are thought
to be better at choosing the “right” conflict when they defect as suggested by Lake (1992).22
According to this logic democratic leaders go through a more thorough internal reasoning before
risking external conflict. If wining a conflict seems unlikely democratic governments are backing
down. However, have they decided to fight they are thought to expend significantly higher
resources on winning (Fearon 1994: 585).
21
Tomz (2002) was first to show in an impressively detailed account of the Argentine crisis around 2001 that
changes in preferences are likely if the economic circumstances deteriorate. A precondition for this change is that
voters have access to and can process information on the economic and financial situation.
22
Bueno de Mesquita, Morrow, Siverson and Smith (1999), Partell and Palmer (1999), and Eyerman and Hart (1996),
testing the argument using different proxies for audience costs find democracies to be better able to prevail in disputes.
For a comprehensive overview see Gelpi and Griesdorf (2001). Critical accounts of the argument are presented by
Desch (2002) and Slantchev (2004).
11
What was described as a major disadvantage of democracies turns into an advantage on
the international stage. The domestic political pressure lends strong credibility to leaders’ default
threats or other aggressive actions. Given the condition of economic crisis, democratic leaders
can credibly claim that they will soon have no other option to avoid further hardship on the
population than by defaulting on external debt. This strategy is reflected in a quote by President
Garcia at the time of the Peruvian Moratorium declaration in 1985, which made it clear that the
choice for him was “either debt or democracy” (Drake 1989: 53). A threat by an autocratic leader
in the same position would seem less credible.
A democratic government that decides to engage in a conflict with its external creditors
can be seen as highly resolved to take all means to reach debt relief of some sort. Threats to
repudiate are backed by a majority of the population, lending high credibility to a leader’s
aggressive external policy.
The audience cost argument has been used in a number of related analyses of economic
policymaking and international economic cooperation.23 How audience costs play out in the
context of new democracies seems to be a blind spot, however, at least in the field of economic
policymaking.
3. Hypotheses
In this section we briefly present our three main hypotheses on the relationship of regime type,
experience with democratic institutions and sovereign default behavior of governments. The key
underlying question is whether regime type is what affects external debt polices? And if there is a
23
Mansfield, Milner and Rosendorff (2002) find that more democratic regimes have a higher likelihood to cooperate
via international trade agreements. Leblang (2005) argues that democracies face higher audience costs than
autocracies when abandoning a de jure exchange rate regime. Incumbent governments are found to be heavily
penalized in terms of re-election chances. Also Lektzian and Souva (2003) finds regime type to affect foreign
economic policy goals, in particular the choice of sanctions governments impose on other states.
12
difference, does it matter how experienced citizens and policymakers of a country are with
democratic institutions? Our main arguments are based on domestic audience cost theory and on
theories describing the role of political liberalization for macroeconomic policymaking presented
in section 2.
In line with the preceding paragraphs, we argue that democratic leaders generally face a different
trade-off during crisis than autocrats (O’Donnell 1978, Kaufman 1985, Frieden 1988, 1989,
Haggard and Kaufman 1992, 1995, Tomz 2002 a.o.). In democracies, audience costs, in this case
the political costs of implementing hurtful economic adjustment against resistance from ‘loser
groups’, are likely to be higher and increasing over the crisis period. Therefore, the government
constantly has to chose between keeping its external reputation and holding on to power
internally, driving it at times to jeopardize the former for the sake of the latter given that the
economy is in deep crisis (Tomz 2002).
A first testable implication of this view would be that a state’s behavior towards creditors
is driven by the type of regime - democratic or autocratic. We predict the following hypothesis to
be supported by the data:
Hypothesis 1: Democratic governments behave more aggressively than autocracies in debt crisis.
The first hypothesis states a positive relationship between democracy and coercive debtor
behavior on average. To gain a better understanding of the relationship of democratic institutions
and domestic audience costs of policy adjustment it seems necessary to look also at different
levels of democracy. From existing theories presented above we conclude that audience costs
should be high in countries with advanced democratic institutions (Fearon 1994, McGillivray and
13
Smith 2008). As an extension to this argument, we expect countries that rank high on the
democracy-scale to take on more aggressive debt policies given that the country is experiencing
an economic crisis.
The main reason could be that leaders in more developed democracies face larger
difficulties in implementing unpopular economic policies (Tomz 2002). Citizens in countries
with very advanced democratic institutions are likely to be more experienced with the policy
making process. In more established democracies we also assume a higher likelihood that
opposition groups are more institutionalized and active. Such groups have longer experience with
their constitutionally guaranteed veto powers, preventing the implementation of government
policy proposals. Concretely, they may be better able to exert veto power through parliamentary
decision making procedures and/or through presence in the media and on the streets engaging in
strikes and protests. We would therefore expect the following hypothesis to hold:
Hypothesis 2: The degree of government aggressiveness towards external creditors increases
with the degree of institutionalization of democratic decision making processes over
macroeconomic policy. Accordingly, higher levels of democracy correspond to more coercive
government behavior in debt crisis resolution.
Clearly, not all democracies are the same in terms of experience with the political system.
In a sample of emerging economies the issue of political stability seems to be central to crisis
handling. Looking at the literature the evidence on reform effectiveness for newly established
democracies is mixed. Many of the early approaches were skeptic of leaders’ capacities to
implement reforms. This view is echoed in a recent study on militarized interstate conflict by
Jessica Weeks (2008) which concludes that newly established and unstable democracies show
14
less resolve to stick to a contentious policy. One reason could be that weaker institutional
capacities and less decision making routine would render threats to act aggressively less credible
in the eyes of the opponent.
If this argument holds, new democracies would also seem less likely to take a tough
stance towards external creditors. They can hardly claim that institutionalized democratic
opposition to adjustment is what forces them into contract breach. Thus, creditors can easily
argue that a new democratic government can a) put all the blame of economic hardship on the
previous ousted regime (Stokes 2001) and b) exploit the “honeymoon effect” after its
inauguration to implement a quick and comprehensive economic reform package even if it
includes unpopular austerity measures (Hirschman 1987, Haggard and Kaufman 1995).
A second argument is that new democracies have strong incentives to attract foreign
investors to enhance growth and development. In the early years of political transition, when it is
not clear that democracy is irreversible, governments are seen as highly dependent on growth and
increase in revenues to provide public goods (Linz 1978). Public goods provision is an essential
part of democratic government that makes it distinct from autocratic rule (Bueno de Mesquita et
al. 2003; for a more nuanced view on autocratic provision of public goods see Clark 2005). Both
arguments, the enhanced capacity to implement comprehensive adjustment and the high reliance
on good relations with foreign investors make cooperative behavior much more likely. This leads
us to the third prediction:
Hypothesis 3: Leaders of newly established and unstable democracies face less resistance against
painful adjustment policies. They are therefore expected to act more cooperatively towards their
external creditors than established democracies.
15
Our three hypotheses will be tested on data for 31 emerging countries between 1980 and
2007 using a new Index of Government Behavior as the main dependent variable. We also test
the effect of democracy on the simple standard default variable by S&P which is widely used in
the existing literature. Results are presented in section 7 below. The index allows us to create a
more nuanced picture of the institutional effects on actual government policy choices during
crises.
4. Measuring Government Behavior: The Index of Government Coerciveness
In this section we briefly present the “Index of Government Coerciveness” which serves
as the dependent variable in the empirical analysis. The index is coded on a yearly basis and debt
policy changes can be tracked over the course of multi-year crisis episodes. 24
Construction of the Index
For the construction of the index we relied partly on previous attempts to categorize government
behavior by Cline (2004) and Roubini and Setser (2004). Additionally, we could draw on two
key policy documents listing “best practices” for debt crisis resolution that found wide
acceptance among policy makers and private sector representatives. These are the IMF’s criteria
of good faith efforts in debt negotiations with creditors (IMF 1999; 2002) and the criteria outlined
in the so called Principles of fair debt restructuring by the Institute of International Finance (IIF
2006).
24
While we acknowledge the need to identify government actions affecting various creditor groups, the focus
throughout this paper is solely on government behavior towards private international creditors. Negotiations with
official creditors, IFIs or domestic banks or investments funds are not taken into account.
16
The “Index of Government Coerciveness” during debt crises consists of 9 sub-indicators. These
are measures of observable government behavior and of rhetoric of crucial members of
government towards international creditors.25 Each sub-indicator is a dummy, which is coded 1 if
the respective action by the government is observed and zero otherwise. The final index is simple
additive measure with a lower bound of 1. The highest possible score is 10 and indicates the
highest level of government coerciveness. A score of 1 - on the other extreme - indicates that the
debt problem was resolved in a fully cooperative way without missed payments. Accordingly,
none of the 9 sub-categories of coercive behavior was coded as 1.
The Index and sub-indicators were coded based on a systematic and standardized evaluation of
main policy reports, all standard reference books on debt crises and more than 19,000 pages of
articles from the financial press. A detailed description of the coding process, the data and
stylized facts on many debt crisis cases from the 1980s until today can be found in Enderlein,
Müller and Trebesch (2008).
The 9 binary sub-indicators are the following:
1) Payments missed (yes/no)
The category “payments missed” is coded 1 if the government misses a due interest or
principal payment on bonds or loans owed to private international creditors. This includes
cases in which the government arranged a temporary roll-over of debt payments, but it does
not include missed payments that occurred within the grace period foreseen in the respective
debt contract.
25
We only consider actions and statements by core members of the government, including the president or prime
minister, the economy and or finance ministry and the presidency of the central bank.
17
2) Unilateral payment suspension (yes/no)
Payments that are withheld unilaterally and without warning creditors are a clear sign of noncooperative, unilateral behavior. For this reason, we include the sub-indicator “unilateral
payment suspension”. It is coded 1 whenever the government incurs arrears unilaterally,
without agreeing with its creditors on a payment deferral and/or if creditors are not notified of
payment delays ahead of time.
3) Suspension of interest payments (yes/no)
The suspension of interest payment is coded as a separate indicator of payment behavior. The
reason is that a government that fully suspends interest payments sends a strong signal of its
unwillingness to service its debt, even at a reduced pace. A series of debtor governments have
explicitly ignored creditor demand for partial debt payments even rejecting to make symbolic
token payments on interest. The sub-indicator is coded 1 in case the government suspends
interest payments on sovereign bonds or public syndicated bank loans for more than 90 days
in a given year.
4) Freeze on assets of non-residents (yes/no)
In a series of crisis cases, governments issued emergency decrees that lead to an effective
freeze of creditor assets in the country, which should certainly be regarded as coercive
government behavior. We therefore also include a sub-indicator “freeze on assets of nonresidents”. It is coded 1 for any kind of additional capital or exchange controls that are
enacted during crisis years and that directly affect debt flows to foreign private creditors
(including private to private debt repayment).
18
5) Explicit moratorium or default declaration (yes/no)
The sub-indicator is coded 1 in case a key government actor, i.e. the President, the Prime
Minister, the chief debt negotiator or Ministers of Finance, Economy or Planning, or the
President of the Central Bank officially proclaims the decision to default. It is interesting to
note that most de facto moratoria were actually not officially declared. In most cases
governments have avoided to declare default publicly falling into arrears or starting debt
renegotiation without an official proclamation. Therefore, an official declaration of default
can be seen analogous to a declaration of war, and usually only takes place in an already very
conflictive situation.
6) Explicit threats to repudiate on debt (yes/no)
The sub-indicator is coded 1 if a key government actor publicly threatens to repudiate on debt
or to impose a unilateral moratorium. Such threats, often issued by populist governments, are
normally widely reported in the press and are generally thought to have a major public
impact.
7) Breakdown or refusal of negotiations (yes/no)
We coded 1 if either one of the following criteria applied: (i) the refusal of governments to
engage in early negotiations with creditors and (ii) delays or even breakdowns of debt
negotiations of more than 3 months that are caused by unilateral government behavior.
Delays that are caused by creditor coordination failure or outright inter-creditor disputes are
not coded.
19
8) Data disclosure problems (yes/no)
As a further proxy for negotiation behavior, we include a sub-indicator that is coded 1 if the
government explicitly refuses to provide timely information on crucial negotiation related
issues or if there is a dispute with creditors due to the provision of grossly inaccurate data.
The provision of accurate macroeconomic and financial data by debtor governments is of
high importance for private creditors seeking to understand the debtor government’s financial
stance and repayment capacity, in order to evaluate any potential restructuring offers.
9) Forced and non-negotiated restructuring (yes/no)
This indicator considers whether the restructuring was ultimately negotiated or not. It
captures instances (i) where the government enforced a fully unilateral restructuring or (ii)
where the government issued a non-negotiated offer on a final agreement. While most
modern-type bond restructurings involve a final, unilateral offer that is usually not amended
after it is launched, even those offers can be the result of a coordination and negotiation
process.
The sub-indicator thus aims to differentiate between cases of close creditor
consultations and other restructurings, e.g. in Argentina in 2001 or 2005, where the
government rejected to engage in close negotiations before putting the offer to the market.
Additionally, we aim to capture cases of forced restructurings. This includes cases where
governments unilaterally decide to lower the interest rate on debt, or to restructure debt owed
by the private sector without any prior consultations (e.g. Argentina 1982).
20
Case selection and coding
Generally, we started to code cases from 1980 on.26 Regarding the selection of countries,
our list initially included all 136 developing and emerging economies in the Global Development
Finance database. First, we excluded countries which did not feature a default since 1980. Given
our focus on disputes between debtor governments and private creditors, we further excluded the
poorest, least developed countries (LDCs).27 The rational for excluding low income countries is
that they usually have very limited access to private financing and government lending tends to
be heavily dominated by debt to official creditors such as donor governments or the IMF.28
Clearly, the information base for coding was more comprehensive for large countries and
default cases. We excluded a number of countries from our dataset for which there was only
insufficient information available, even though they are not regarded as LDCs.29 In the absence
of a broader information base we decided to provide no information rather than risking to present
wrong or incomplete information on the behavior of governments. While this incurs the
possibility of bias we tried to control for possible effects of size and region in the regression
analyses later on. Nevertheless, we believe our data-set of government behavior can serve as an
adequate base of analysis.
26
The main reason for this is the difficulty of gathering sufficient information on government behavior in debt crises
before 1980.
27
The main selection criterion was the United Nations definition of Least Developed Countries. Further non-LDC
defaulters not considered were the low-income countries of Cameroon, Congo, Ghana, Guyana, Honduras, Kenya,
Mongolia, and Zimbabwe and countries of former Yugoslavia (Bosnia and Herzegovina, Croatia, Macedonia, Serbia
and Montenegro, Slovenia).
28
The debt restructuring process in these countries is mostly dominated by Paris Club and IMF talks while
commercial creditors play a less important role. Moreover, negotiations with private creditors usually cover only small
debt amounts and receive little attention in the press and in the literature. This makes it extremely difficult to draw any
meaningful conclusions about public-private negotiations. Besides, Lex Rieffel notes that private financing follows a
very different logic than financing by governments or IFIs: “commercial bank lending and bilateral donor agency
lending are functionally quite distinct. The daily business of commercial banks is to make profit by pricing and
managing credit in a huge global market place. (…) By contrast bilateral donor agencies make loans to developing
country borrowers to advance various foreign policy objectives: economic growth, alleviation of poverty, regional
stability, civil order, and the like” (Rieffel 2003:105).
29
These are Côte d’Ivoire, Gabon, Iran, Nicaragua, Trinidad und Tobago and Vietnam. The information available
from the press and other sources on the 1980s and 1990s debt crises in these countries was not comprehensive enough
to allow for objective and reliable coding. In contrast, small country debt restructurings of more recent years (e.g.
Dominica, Grenada, and Moldova) were much better covered by the press and by detailed official policy reports.
21
Ultimately, we ended up coding cases in 31 countries, which featured a sovereign debt
crisis since the year 1980. Table 4 in the Appendix provides an overview on the default periods
covered, corresponding to 251 yearly events.30 The dataset used here is coded year-by-year. It
provides indicator values for every debt crisis year since 1980, i.e. capturing year-by-year
fluctuations in the 9 sub-indicators of government behavior during a crisis. An overview of the
development of the index since 1980 is provided in Figure 1 in the Appendix. As can be seen, the
average degree of coerciveness in crises has stayed relatively constant over the three decades,
although the index appears to have become more volatile in the more recent period.
5.
Some Stylized Facts on Democracies in Default
Before going into the details of our estimation approach (section 6), it is useful to sketch
out some stylized facts on the behavior of democratic versus autocratic governments in default.
Looking at the coding results presented in Enderlein et al (2008), it is striking that all but one of
the most conflictive debt restructuring episodes since 1980 took place in democracies31, namely
in Argentina 2002-2005, Brazil 1987 and 1989, the Dominican Republic 1989 to 1990 and Peru
1985 to 1989. All of these crises are characterized by very coercive behavior of governments
towards external private creditors, indicated by an index value of 7 or higher. It is also notable
that, at the peak of the dispute with creditors, Argentina, the Dominican Republic and Peru all
were established democracies with at least 5 years of democratic rule. This gives further
motivation to test whether established democracies tend to behave more coercively in crisis
resolution (hypothesis 3). Brazil in 1987 and 1989 was still a young democracy, when its
government imposed exceptionally coercive actions on the country’s external creditors.
30
31
This includes the Republic of Yugoslavia but the defaults of the early 1990s in its follow-up Republics.
The exception is Nigeria in 1990-1991, which was not democratic at the time.
22
Nevertheless and despite the fact that democratic transition occurred only in 1985, domestic
audiences and opposition forces were already very strong in the late 1980s. As a result, electoral
pressure played a crucial role for the unilateral debt policies of President Sarney from 1987 to
1989.32
Autocracies, in contrast, have often behaved particularly cooperatively in past crises. The
debt crises in autocracies such as Algeria, Chile, Morocco and South Africa during the 1980s and
1990s were all resolved in a very consensual manner, with average index values of 3 or lower.
The example of autocratic Romania in the 1980s discussed in the introduction represents a
particularly extreme case. The descriptive statistics tell a similar story. The correlation between
democracy and the index of coercive government behavior is positive for all democracy measures
employed in the econometric analysis. Higher levels of democracy clearly coincide with higher
degrees of coerciveness.33 Figure 3 in the Appendix provides further visualization, by plotting the
index distribution grouped by regime type. As can be seen at first sight, democracies have a
considerably larger proportion of observations in the “high coerciveness” range of index values 5
or higher. In contrast, the distribution for non-democracies is rather hump-shaped, with most
country-year observations in the “low coerciveness” range. It is also insightful to distinguish
between particularly conflict-riddled and particularly cooperative country-year observations. The
average Polity Score for conflictive episodes - with an index value of 5 or higher - is 5.01 (79
yearly obs.). Contrarily, the average polity score is only 1.13 for episodes with a low level of
disputes, i.e. with an index value lower than 3 (72 yearly obs.).
32
The 1987 moratorium coincided with a deep political crisis, with mass protests and strong opposition against
Sarney by the Congress. Many analysts at the time interpreted the conflictive debt policies as aimed to improve the
government’s popularity. In 1989, President Sarney again adopts a conflictive stance in his debt policies towards
international creditors, after having cooperated in 1988. This novel policy shift took place at a time of fastly eroding
popularity and right after a devastating election result for his party. (Aggarwal 1996, p. 478, FT, 23 Febr. 1987,
Reuters 16 Nov 1987, FT, 17 Nov 1988, Reuters, 25 July 1989)
33
As an example, the correlation of our index and the Polity IV Score is 0.22 for the sample of debt crisis years
23
All of this indicates that there seems to be a positive relation between the degree of
democracy and the degree of conflict that governments incur. However, it is necessary to validate
this relationship in a more systematic way by controlling for additional determining factors,
which we do in the following section.
6.
Empirical Test
The aim of this section is to explore the relationship between regime type and government
behavior during crisis econometrically. We explain the estimation techniques and describe the
main explanatory variables and controls.
Econometric Technique
To test the role of democracy in debt crisis resolution, we construct a yearly panel dataset
for 27 developing countries that have defaulted on sovereign debt obligations held by private
creditors between 1980 and 2004 (a list is provided in Table 4 in the appendix).34
The above described index is used as proxy for coercive government behavior and taken
as dependent variable. One issue arising with this approach is certainly weighting. It is not
straightforward to decide which weight each of the 9 sub-indicators of government behavior
should have in the overall index. In our view, an additive index of each of the 9 dummy variables
34
Note that, as argued above, we consider only countries that had reasonable access to finance. Accordingly, LDCs
and a number of other countries are excluded. The main selection criterion was the United Nations definition of Least
Developed Countries. Further non-LDC defaulters not considered were the low-income countries of Cameroon,
Congo, Ghana, Guyana, Honduras, Kenya, Mongolia, and Zimbabwe and countries of former Yugoslavia (Bosnia and
Herzegovina, Croatia, Macedonia, Serbia and Montenegro, Slovenia). The main reason for this is the difficulty of
gathering sufficient information on government behavior in debt crises before 1980. Moreover small countries with a
population below 1,5 million are excluded due to notorious problems of data reliability in such countries, particularly
in the 1980s.
24
is a good choice as it is straightforward and transparent. However, it might be appropriate to
employ more objective weighting methods when it comes to data analysis. Here, we resort to the
standard technique of principal component analysis (PCA) to derive weights of each subindicator.35 The key idea behind principal component analysis is to summarize the information of
a set of variables in a smaller set of newly created continuous variables (principal components),
while retaining as much information as possible. For the data at hand, the first principal
component contains more than 30% of the variation of the original 9 sub-indicators. The
correlation between our simple additive index value (from 1 to 10) and the first principal
component is a high 0.99. It can thus be seen as a valid dependent variable for our purposes.36
Formally, we estimate variants of the following reduced form equation:
COERC it = α + β 1 Democracyit + γX it + u it
where COERCit is our measure of coercive government behavior in crisis years, α is a constant
or a vector of country fixed effects, Democracyit is a measure of democracy, X it is a set of
economic and political control variables and u it are robust standard errors. All specifications
further include dummies for world regions (following the World Bank classification) and time
dummies (capturing the three decades since 1980).37
The baseline estimation methodology chosen is standard ordinary least squares (OLS) for
which all crisis-year observations are pooled in a cross-section. Given our aim to identify true
underlying effects, the results are further validated by employing additional estimation
35
Jolliffe (2002) provides an encompassing discussion of PCA techniques.
Note that, principal component analysis provides a dependent variable of government behavior with large variation
in parameter values. As a result, standard regression techniques may be employed.
37
The dummy is included to account for changes in the structure of emerging market borrowing. While in the early
1980s syndicated bank loans dominated sovereign lending, the post-Brady Deal era is characterized by an increasing
share of bond debt in total external debt, traded in deep secondary markets.
36
25
techniques, in particular panel and limited response models. Details on the robustness analysis
are discussed in section 7.2.
Main Explanatory Variables: Democracy and Democratic Experience
The main explanatory variable of interest here are measures of democracy. 38 To test
hypothesis 1 on the general role of regime type, we employ the democracy dummy developed by
Przeworski, Alvarez, Cheibub and Limongi (2000) and updated up to the year 2000 by Saiegh
(2005). After rescaling, it takes the value of 1 for democracies and the value of 0 for autocratic
regimes. As an alternative binary measure of democracy, we construct dummy variables based on
the widely used PolityIV composite index which ranges from +10 (very democratic) to -10 (very
undemocratic).39 Concretely, we build a dummy with a value of 0 (non-democracy) for Polity
scores of smaller or equal to 0, and a value of 1 (democracy) for Polity scores of 1 or higher. As a
further differentiation, we construct three additional dummy variables in the spirit of Jaggers and
Gurr (1995), Mansfield and Snyder (2002) and others, capturing three separate categories of
democracies. We look at “pure democracies”, “new democracies” and “pure autocracies” again
based on the Polity score.40
To test hypothesis 2, of whether higher degrees of democracy imply higher coerciveness,
we rely on continuous measures of democracy instead of the binary dummies used before. As
baseline continuous measure, we use the original Polity IV score from -10 to 10. In a second step,
38
We decided to test the regime type hypotheses using the three most widely used democracy indicators, to guarantee
that results are not dependent on the variable and measurement approach employed. For a detailed comparison of
institutional measures see for example Munck and Verkuilen (2002).
39
We employ the 2004 release of the Polity IV database.
40
We code polity scores from -6 to -10 as “pure autocracies”, values of 6 to 10 are coded as “pure democracies” and
scores in between as “new democracies”. In doing so our categorization differs slightly from the initial classification
of “coherent regimes” (democratic or autocratic) and “incoherent regimes” suggest by Jaggers and Gurr (1995). The
main reason is that applying their categories we lost out a large number of cases in the category of pure autocracies.
However, it should be noted that the direction of effects were not different when we applied the Jaggers and Gurrcategorization. They can be made available upon request.
26
we use an interaction term of the Polity score and the rescaled Przeworski et al dummy. This
variable excludes variations of autocratic rule but captures the level of democracy in those states
that fulfill the minimum criteria of Przeworski et al (2000). Thirdly, we also use a continuous
measure, based on the Freedom House (2006) data and coding criteria. Precisely, we take the
average of the indicators on “Political Rights" and ”Civil Liberties", which both range from 1 to
7. After rescaling, higher values of the aggregate Freedom House index indicate a more
democratic system.
The role of democratic experience (hypothesis 3) is tested in a sub-sample of democracies
only. To distinguish between young and more established democracies, we construct three
measures of experience with democratic institutions inspired by Vollmer and Ziegler (2008).
First, we include a dummy for “infant democracies” taking the value of 1 if a country
experienced less than 5 years of consecutive democratic rule (i.e. 1, 2, 3 or 4 years) and a related
dummy for “experienced democracies” with 5 or more years of consecutive democratic rule.
Additionally, we follow the example of Besley and Kudamatsu (2006) and create a variable
capturing contemporaneous measure denoting the fraction of democratic years between year t -4
and t.41
Control Variables
To avoid omitted variable bias and to better identify the immediate effect of democracy
for crisis resolution, we control for economic and financial conditions domestically, as well as
externally. The variables chosen are fairly standard and derived from the large empirical
literature on the determinants of default and debt distress that was summarized above (e.g.
41
Further empirical studies that employed similar categorizations to test the effect of different sub-categories of
democracy and autocracy on the likelihood of militarized conflict and on growth and economic policies are
Mansfield and Snyder (2002), and Rodrik and Wiarczig (2005) and Epstein et al. (2006) respectively.
27
Manasse, Roubini and Schimmelpfennig 2003 for an overview). First, we include two key debt
indicators capturing potential solvency and liquidity problems, namely the ratio of total external
debt to gross national income (GNI) and short term debt to reserves. The ratio of debt to GNI can
be seen as a good proxy for debt service pressure, while a high short term debt to reserves ratio
can indicate severe although temporary constrains in being able to repay foreign currency debt.
Higher levels of both variables are thus expected to increase the likelihood of coercive behavior.
To control for macroeconomic conditions in a given year, we include the log of inflation as well
as a variable capturing the GDP’s deviation from trend (in %).42 We also include a variable
capturing the overall weight of private creditors in government finances, namely the share of
government debt owed to private creditors in total public debt. All of these variables are taken
from the World Bank’s GDF and WDI databases.
Lastly, it is meaningful to control for the role of external factors, namely the global
interest rate (LIBOR) and the size of total capital flows towards developing and emerging
economies.43 While higher interest rates are expected to increase debt payment pressure and, thus,
coerciveness, higher capital flows towards developing countries are believed to lower constraints
and raise the opportunity costs for governments to behave non-cooperatively towards financial
market participants.
7.
Results
7.1. Main Results
42
43
Calculated by using the Hodrick-Prescott filter.
Total flows to all countries included in the World Bank’s Global Development Finance dataset.
28
Results for Hypothesis 1: Are Democracies More Coercive Towards Private Creditors?
Table 1 summarizes the results regarding hypothesis 1. We tested whether, ceteris
paribus, democracies act more aggressively towards their private external creditors when they
enter a sovereign debt crisis. The estimations indicate that this is the case, underlining the validity
of the hypothesis. The coefficient for the democracy dummy is positive, highly significant and
has a sizable quantitative effect, even after controlling for a large number of economic variables
and when using different econometric techniques (see section 7.2.for details on the robustness
analysis). Regime type and democracy appears to be a main explanation of why governments
behave coercively towards creditors in periods of financial distress. As can be seen in Table 1,
this overall result is the same when using our baseline proxy of democracy from Przeworski et al.
(2000) or the dummies based on the Polity IV score.
Regarding the economic control variables, they are broadly in line with the literature and
theoretical predictions. The debt/GNI ratio, the proxy for liquidity constraints (short term debt to
exports) and the variable capturing high rates of inflation is significant and positive, indicating
that heavier financial constraints and economic instability are associated with more conflictive
government behavior. The variable capturing a higher share of debt owed to private creditors is
negatively signed. Governments appear to act more cooperative with private creditors when these
are crucial for the countries’ overall access to capital. The only surprising result is the negative
(albeit insignificant) coefficient of the global interest rate, as we expected higher interest rates to
increase financial and political pressure.
29
Table 1: Democracies vs. Autocracies in Debt Crisis Resolution
Model 1
with Dummy by
Przeworski et al.
Democracy Dummy
(Przeworski)
Democracy Dummy
(Polity>0)
Model 2
with Dummy
based on
Polity>0
Model 3
with Dummy
for Pure
Democracies
Model 4
with Dummy
for Pure
Autocracies
1.109***
(0.222)
1.227***
(0.259)
Pure Democracies
Dummy (Polity ≥ 6)
0.692***
(0.240)
Pure Autocracies
Dummy (Polity ≤ -6)
-0.958***
(0.312)
0.013***
(0.002)
0.170***
(0.028)
-1.140***
(0.415)
0.123***
(0.033)
-0.214
(0.943)
-0.026
(0.046)
0.000
(0.000)
-2.106***
(0.682)
0.013***
(0.003)
0.154***
(0.029)
-0.578
(0.432)
0.085***
(0.032)
-0.203
(1.012)
-0.038
(0.048)
0.000
(0.000)
-1.396
(1.094)
0.012***
(0.003)
0.141***
(0.030)
-0.891**
(0.430)
0.082**
(0.032)
-0.096
(1.058)
-0.054
(0.049)
0.000
(0.000)
-0.736
(1.151)
0.013***
(0.003)
0.150***
(0.033)
-0.908**
(0.421)
0.077**
(0.032)
-0.134
(1.043)
-0.065
(0.051)
0.000
(0.000)
0.033
(1.044)
Regional Dummies
YES
YES
YES
YES
Decade Dummies
YES
YES
YES
YES
External debt / GNI
Short-term Debt /
Reserves
Share of Debt to
Private Creditors
Inflation (log)
GDP (% deviation
from trend)
Global Interest Rate
(LIBOR)
Total Capital Flows to
Developing World
Constant
Observations
Adj. R²
202
206
206
206
0.304
0.269
0.233
0.234
Note: Pooled OLS Regression. Dependent variable is the index of coercive government behavior
weighted through PCA. ***/**/* denotes significance at a 1/5/10 % respectively. Robust standard
errors in parentheses.
Results for Hypothesis 2: Do Higher Degrees of Democracy Imply Higher Coerciveness?
Departing from these baseline results, we go on to test whether the degree of democracy matters.
With a view to the theoretical arguments made above, we expected higher values on a democracy
scale to be associated with more conflictive crisis resolution patterns. The results in Table 2 give
strong support to this assertion. The continuous Polity variable is highly significant,
quantitatively important and positive. This is the case when using the original index score and
when interacting with the democracy dummy by Przeworski et al. Also the average Freedom
30
House score is a significant and important predictor for the degree of coercive actions imposed by
governments. Apparently, higher degrees of democracy amplify the effect in debt crisis
resolution.
Table 2: Degrees of Democracy and Coerciveness
Model 1
with
Continuous
Polity IV
Score
Poility IV Score
Model 2
with
Democracy
Interaction
Term
Model 3
with Continuous
Freedom House
Score
0.063***
(0.019)
Polity x Dem.Dummy by
Przeworski
0.087***
(0.027)
0.012***
(0.003)
0.151***
(0.030)
-0.836*
(0.428)
0.082**
(0.032)
-0.182
(1.049)
-0.051
(0.049)
0.000
(0.000)
-0.463
(1.090)
0.010***
(0.003)
0.165***
(0.032)
-1.245***
(0.424)
0.118***
(0.034)
-0.402
(0.997)
-0.057
(0.048)
0.000
(0.000)
-1.132
(0.713)
0.227***
(0.080)
0.014***
(0.003)
0.145***
(0.032)
-0.869**
(0.428)
0.078**
(0.032)
-0.121
(1.057)
-0.058
(0.048)
0.000
(0.000)
-1.164
(1.102)
Regional Dummies
YES
YES
YES
Decade Dummies
YES
YES
YES
Observations
Adj. R²
206
196
212
0.237
0.272
0.226
Freedom House
External debt / GNI
Short-term Debt /
Reserves
Share of Debt to Private
Creditors
Inflation (log)
GDP (% deviation from
trend)
Global Interest Rate
(LIBOR)
Total Capital Flows to
Developing World
Constant
Note: Pooled OLS Regression. Dependent variable is the index of coercive
government behavior weighted through PCA. ***/**/* denotes significance at a
1/5/10 % respectively. Robust standard errors in parentheses.
31
Results for Hypothesis 3: Are Established Democracies More Conflictive?
The third hypothesis predicted more experienced democracies to act more aggressively
compared with less experienced or unstable democracies. The results for the sub-sample44 of
democracies shown in Table 3, give support to the argument that experience with democracy
matters. All three measures capturing experience with democracy are significant with a sizable
quantitative effect (see table 3). Infant democracies, for which the transition to democracy lays
less than 5 years back, behave significantly less coercive towards external private creditors
during crises. In contrast, experienced democracies and countries with a higher share of
democratic years in recent history exert systematically more conflictive behavior.45
Table 3: The Role of Democratic Experience
44
The sub-sample only includes observations for which the yearly binary measure by Przeworski et al indicates a
democratic regime. The results for hypothesis 3, however, are unaffected when the sub-sample of democracies is
identified via dummies based on the Polity IV score, even when we include only observations of “pure democracies”
with a Polity score of 6 or higher
45
Note that regional dummies are not included in the specifications of Table 3. The reason is that, in the smaller subsample of democracies, some of the regional dummies have a high correlation with the binary variables for young or
established democracies thus leading to a potential bias in the estimations.
32
Infant Democracies
(Dummy)
Established Democracies
(Dummy)
Share of Democratic years
in previous 5 years
External debt / GNI
Short-term Debt / Reserves
Share of Debt to Private
Creditors
Inflation (log)
GDP (% deviation from
trend)
Global Interest Rate
(LIBOR)
Total Capital Flows to
Developing World
Constant
Model 1
Model 2
Model 3
Accounting for
Infant
Democracies
Accounting for
Established
Democracies
With Recent
Democratic
History
-0.731**
(0.336)
0.807**
(0.330)
0.013***
(0.004)
0.293***
(0.074)
-0.625
(0.548)
0.127***
(0.037)
0.519
(1.018)
-0.110*
(0.064)
0.000
(0.000)
-0.285
(0.857)
0.012***
(0.003)
0.297***
(0.075)
-0.524
(0.554)
0.129***
(0.037)
0.392
(0.985)
-0.107*
(0.063)
0.000
(0.000)
-1.086
(0.923)
1.774***
(0.512)
0.012***
(0.003)
0.308***
(0.064)
-0.402
(0.553)
0.129***
(0.037)
0.094
(0.999)
-0.089
(0.062)
0.000
(0.000)
-2.230**
(1.008)
Regional Dummies
NO
NO
NO
Decade Dummies
YES
YES
YES
Observations
Adj. R²
132
132
132
0.196
0.203
0.223
Note: Pooled OLS Regression. Dependent variable is the index of coercive government
behavior weighted through PCA. ***/**/* denotes significance at a 1/5/10 % respectively.
Robust standard errors in parentheses.
7.2. Robustness Analysis
To verify the validity of our results, we conducted a series of robustness checks. We first
estimated the above models with a set of alternative specifications and additional variables.
Altogether, our main finding - the significant and positive coefficients of the democracy and
democratic experience measures - is very stable under different model specifications. In
particular, results are not significantly affected when including key institutional measures such as
constitutional system type, a proxy for veto players, or government polarization along ideological
33
lines.46 Also adding further economic variables such as GDP per capita, the balance of the current
account to GDP, the degree of openness (imports+exports/GDP) and several other standard
variables widely employed in the sovereign debt literature does not change our main findings, but
often decreases the sample due to missing values. The same is true for variables capturing the
scope of IMF involvement (IMF disbursement as % of quota or annual net contributions by the
IMF). We also included a variable that controls for duration dependence (number of years a
country is already in default) and a dummy for past defaults (in the previous 5 or 10 years).
Again, results remain very similar.
As a further main robustness check, we investigated in how far our results are driven by
the composition of our dependent variable, in particular if any of the 9 sub-indicators is particular
important for our findings. For this purpose, we used a PCA weighted dependent variable based
on 8 instead of 9 of the sub-indicators and excluded each of the individual indicators stepwise
from the overall index. We then ran all of the above regressions with this new set of dependent
variables. It turned out that none of the individual sub-indicators are crucial for our results.
Overall, the findings were highly robust to alterations in the dependent variable. In a similar vein,
we checked in how far the weighting approach via PCA affects the results. We thus used the
simple additive index of government behavior with numerical values from 1 to 10 as dependent
variable, instead of the continuous PCA weighted measure. Given the ordinal character of the
additive index, we resort to a standard ordered probit model estimated in the cross section. As
46
Constitutional system type is approximated by a dummy for purely presidential systems taken from the Database of
Political Institutions (DPI) (Beck et al. 2001). The variable on government ideological polarization is also taken from
DPI. We use a dummy for left government, which takes the value of 1 if the government is left oriented and zero
otherwise. Political constraints are approximated by Henisz’s (2000) Polcon III measure.
34
can be seen in Table 6 of the Appendix, results are not affected, as all three hypotheses are
confirmed in an ordered probit estimation framework.47
In a next step, we evaluated whether the results change when standard random and fixed
effects panel data models are employed.48 Given the focus on democracy, it is more appropriate
to apply random effects estimation, as regime type shows only limited variability over time.
Nevertheless, we also check our results using fixed effects estimation. As shown in table 7 in the
Appendix, the results regarding hypotheses 1 and 2 hold in both, a random and fixed effects panel
estimation framework. However, the result regarding hypothesis 3 cannot be confirmed, as the
dummy for “established democracies” turns clearly insignificant.
Finally, we aim to account for the possibility that selection into default might not be
exogenous, i.e. that the group of defaulting countries shares some unobserved characteristics that
also affect government behavior.49 We thus set up a Heckman selection model, with “sovereign
debt distress”50 as binary dependent variable in the selection equation, and the pca weighted index
of government behavior as dependent variable in the primary equation. In order to account for
selection effects, we expand the sample by adding additional observations from 23 countries that
did not default in the period 1980 to 2004. To identify the model, we choose the share of bond
debt in total public debt and include it in the selection equation only. The choice of this
identifying variable appears valid, as the share of bond debt is a highly significant determinant of
47
We get similar results when estimating the ordered probit model in a panel framework, following the routine
developed by Rabe-Hesketh et al. (2000) and Frechette (2001a, 2001b).
48
The panel is highly unbalanced given that our dependent variable is observed in crisis years only.
49
For obvious reasons, we can only observe government behavior during crises for crisis years, i.e. for the subsample of years in which countries actually default. Heckman (1979) pointed out that such incidental data truncation
can lead to sample selection bias.
50
To identify distress years in the first stage (selection equation) we use our definition above, i.e. the standard binary
default measure as of Standard & Poor's (2006) and add observations in which debt negotiations took place.
35
default, but an insignificant factor for the degree of coercive government behavior.51 The two-step
Heckman regression results are reported in Table 8 of the Appendix. As can be seen, the
estimations yield no evidence for selection effects. Lambda is clearly insignificant, even when
changing country sample or model specification, indicating that the error terms of the selection
and primary equation are not correlated. It thus seems appropriate to apply standard regression
techniques with no need to correct for selection bias. A comparison of the regression results also
shows that the coefficients of the sample selection models closely resemble those of the ordinary
OLS, panel and ordered probit estimations shown above.
Note, that the regressions for the Heckman selection model also reveal an interesting side
finding related to the existing body of literature on regime type and sovereign debt distress. In
our panel of 50 developing countries, we find that democracy, measured via Polity or the
Przeworski Dummy increases the probability of debt distress significantly. This finding in the
cross-section is in line with Saiegh (2005), Alichi (2008) and others who also found democracies
to have a higher likelihood of sovereign default or debt restructurings, but stands in contrast to
the democratic advantage hypothesis of Schultz and Weingast (2003). However, the picture
becomes less clear when running additional regressions on the determinants of debt distress. In
fact, the democracy dummy turns insignificant once the equation is estimated individually in a
panel probit or logit framework. The result is also not overly robust to changes in specification
and sample. We thus conclude that the link between regime type and sovereign default remains
unclear and somewhat contradictory. We can confirm, however, that democracies tend to behave
more conflictive towards their external creditors during default. This overall finding is very stable
to the choice of the estimation technique and to a large number of robustness checks.
51
Once a country defaults, the share of bond debt is unlikely to affect the general stance of governments towards its
private creditors. However, the share of bond debt does matter for the likelihood of default. In fact, since World War
II and until the late 1990s countries which had a large share of bond financing were more unlikely to default.
36
9. Conclusion
In early theoretical models of sovereign lending, governments weigh the costs of
defaulting on their foreign debt against the expected political gains. However, these models did
not differentiate between different types of government. The “democratic advantage”- approach
showed that government behavior towards lenders is likely to depend on the regime type. This
seems reasonable given that the “power calculus” for leaders to remain in office is different for
different types of political systems (Tullock 1987, Bueno de Mesquita et al. 2003 a.o.). Political
leaders in democracies are more constrained in their policy choices. From the “democratic
advantage”-perspective, the main channels through which preferences of a population are
translated into policy are free elections, direct checks on the government through legislative
controls and an independent judiciary (Schultz and Weingast 2003). Although useful to describe
constraints on government policies in general, this concept falls short of explaining why there are
still numerable occasions of noncompliance in democracies.
The puzzle can be solved if a more dynamic view of domestic audience costs of
adjustment policies are taken into consideration. As Tomz (2002) showed for the Argentine
crisis, citizens of democratic countries can force their political leadership into taking an
aggressive stance towards external creditors. Mass protests and general strikes can increase the
pressure on governments to extremes. Therefore, international debt contracts are unlikely to be
respected at any given time. Precisely in a setting where voters can constrain governments, they
may use their power to punish international commitments. At the core of this argument is the
recognition of time variant voter preferences following redistribution of income in the context of
economic crisis. For this to hold, governments have to be opportunistic in the sense that they
prefer short-term gains of power to long-term benefits to the economy. Second, the group of
37
voters that gains from default has to be more influential than the group with a stake in contract
compliance as was shown by Saeigh (2005).
Our empirical analysis of government behavior during debt crises yields three main
results. First, we find democratic governments to act more aggressively towards their creditors on
average. The existing literature which used a binary default variable remains inconclusive on the
effect of regime type on the likelihood of a default. We find unambiguous evidence that regime
type matters for the degree of coerciveness of external debt policies. 52
The second finding is that the level of democracy is important. The degree of
aggressiveness of government policies towards creditors is significantly higher at high levels of
democracy. The third finding we report is that experience with democratic institutions matters for
government behavior. Less experienced democracies act significantly less aggressive towards
creditors.
A significant positive effect on coerciveness can only be reported for countries which
have reached the threshold of five years of consecutive democratic rule. The finding for new
democracies contrasts with the “conventional wisdom” which claimed that leaders in new
democracies were unable to take unpopular reform measures at an early stage of democracy. Our
results hint at the effectiveness with which new democratic leaders exploited “honeymoon
effects” to implement unpopular adjustment rather than looking for debt relief from external
sources.
An important finding is finally that the empirical results show no difference in
government behavior over time. Government aggressiveness remains at the same average level
despite significant changes in the type and composition of investor groups from the 1980s until
52
We also tested the effect of regime type on default as measured by the widely used S&P-indicator and found a
significantly positive effect of democracy on the likelihood of a default.
38
today. Apparently, it made little difference for political leaders whether they knew they had to
face a “banking committee” or if their opponents were dispersed bondholders.
Our findings on the high degree of aggressiveness in democratic countries are not to say
that investors should generally avoid democracies. Nevertheless, they should follow government
behavior and rhetoric closely; especially where the economic situation deteriorates significantly
creating new “champions of noncompliance” (Tomz 2002). Given that threats to engage in
external conflict are a means that democratic leaders rely on very rarely, they should be taken as
a credible sign of the resolve to “fight through” the crisis.
To get a better understanding of the effects of different ruling systems on sovereign debt
policy, further analysis of the variance among democracies and autocracies could yield important
insights. If there is variance in democracies it seems logical that there is also variance in
autocracies.53 According to by Bueno de Mesquita et al. (2003) and Weeks (2008), for example,
some types of autocracies have the capacity to raise audience costs and make credible threats.54
As this paper tried to highlight, further analysis should also take into account the effects of
experience with particular regime types.
53
This argument finds further theoretical foundation in the work of Hannah Arendt (1951) on the elements of
totalitarism and differences between types of totalitarian systems and in Tullock (1987).
54
In their theoretical approach Bueno de Mesquita, Smith, Siverson and Morrow (2003) show that powerful
“selectorates”, i.e. interest coalitions on which autocrats rely to stay in power, can serve an equivalent function to the
electorate in a democratic system. If preferences of the “selectorate” are visible to the outside world, autocrats could
be able to raise audience costs much in the same way as democrats.
39
Appendix
Table 4: Crisis Periods Covered in the Debt Disputes Database
Albania
Algeria
Argentina
Belize
Bolivia
Brazil
Bulgaria
Chile
Costa Rica
Dominica
Dom. Rep.
Ecuador
Grenada
Jordan
Mexico
Moldova
Morocco
1991-1995
1991-1996
1982-1993
2001-2005
2006-2007
1980-1993
1983-1994
1990-1994
1983-1990
1981-1990
2003-2005
1982-1994
2004-2005
1982-1994
1999-2000
2004-2005
1989-1993
1982-1990
2002
1983-1990
Nigeria
Panama
Pakistan
Peru
Philippines
Poland
Romania
Russia
South Africa
Turkey
Ukraine
Uruguay
Yugoslavia
Venezuela
1982-1991
1983-1996
1998-1999
1983-1997
1983-1992
1981-1994
1981-1983
1986
1991-2000
1985-1987
1989
1993
1981-1982
1998-2000
1983-1991
2003
1983-1988
1982-1990
40
Figure 1: The Index of Coerciveness Over Time
Figure 2: The Index of Coerciveness by Regime Type
0
2
Degree of Coerciveness
4
6
8
10
Index Distribution by Regime Type
0
Non-Democracy
1
Democracy
Note: Scatterplot with index values grouped by regime type. The width of the horizontal bars
represents the number of observations for each index value. In line with our definition, higher
index values indicate more conflictive crisis resolution. The categorization of democracy
versus non-democracy is based on the Dummy by Przeworski et al.
41
Table 5: Summary Statistics and Data Sources (Sample of Debt Crisis Years)
Variable
Obs
Mean
Std. Dev.
Min
Max
Data Source
Coerciveness Index
(weighted by PCA)
238
0.00
1.67
-2.33
4.45
Enderlein, Müller and
Trebesch (2008)
Coerciveness Index
(additive)
238
3.63
1.90
1.00
9.00
Enderlein, Müller and
Trebesch (2008)
228
3.42
6.41
-8.00
10.00
Polity IV
Democracy Score (Freedom
House)
226
0.61
0.49
0.00
1.00
Freedom House (average of
“Political Rights" and ”Civil
Liberties"), inverted
Democracy Dummy
(Pzerowski et al)
238
4.71
1.46
1.00
7.00
Przeworski et al (2000) and
Saiegh (2005), inverted
216
81.88
38.81
17.16
253.21
GDF (World Bank)
221
1.99
2.90
0.05
24.00
GDF (World Bank)
227
0.52
0.23
0.02
0.90
GDF (World Bank)
227
2.49
4.00
-11.51
9.42
WDI (World Bank)
230
-0.03
0.12
-0.51
0.36
GDF (World Bank),
authors calculation
238
7.57
2.97
1.22
16.87
IFS (IMF)
Democracy Score (Polity)
External debt / GNI
Short-term Debt / Reserves
Share of Public Debt to
Private Creditors
Inflation (log)
GDP (% deviation from
trend)
Global Interest Rate
(LIBOR)
Total Net Capital Flows to
Developing World
236
127701.90 107291.30 -12104.42 674427.00
GDF (World Bank)
42
Table 6: Results in Ordered Probit Models
Model 1
Model 2
with Dummy with Polity
by Przeworski IV Score
Democracy Dummy
(Przeworski)
Model 3
Accounting for
Established
Democracies
0.792***
(0.180)
0.043***
(0.014)
Poility IV Score
Established Democracies
(Dummy)
0.010***
(0.002)
0.138***
(0.025)
-0.837**
(0.327)
0.099***
(0.029)
-0.174
(0.713)
-0.022
(0.036)
0.000
(0.000)
0.008***
(0.002)
0.116***
(0.023)
-0.595*
(0.305)
0.060**
(0.024)
-0.083
(0.734)
-0.042
(0.036)
0.000
(0.000)
0.623**
(0.254)
0.009***
(0.003)
0.233***
(0.057)
-0.319
(0.411)
0.097***
(0.032)
0.357
(0.732)
-0.080*
(0.047)
0.000
(0.000)
Regional Dummies
YES
YES
YES
Decade Dummies
YES
YES
YES
0.336
(0.516)
0.843
(0.522)
1.448***
(0.520)
2.000***
(0.518)
2.769***
(0.515)
3.367***
(0.513)
3.741***
(0.531)
4.199***
(0.588)
-0.781
(0.721)
-0.284
(0.730)
0.251
(0.732)
0.776
(0.733)
1.461**
(0.738)
2.005***
(0.720)
2.363***
(0.728)
2.956***
(0.765)
0.223
(0.612)
0.573
(0.621)
1.176*
(0.618)
1.793***
(0.616)
2.625***
(0.628)
3.174***
(0.626)
3.584***
(0.678)
3.985***
(0.754)
Regional Dummies
YES
YES
NO
Decade Dummies
YES
YES
YES
Observations
Adj. R²
202
206
132
0.101
0.080
0.080
External debt / GNI
Short-term Debt /
Reserves
Share of Debt to Private
Creditors
Inflation (log)
GDP (% deviation from
trend)
Global Interest Rate
(LIBOR)
Total Capital Flows to
Developing World
/cut1
/cut2
/cut3
/cut4
/cut5
/cut6
/cut7
/cut8
Note: Ordered Probit Regression. Dependent variable is the ordinal index of
coercive government behavior ranging from 1 to 10. ***/**/* denotes significance
at a 1/5/10 % respectively. Robust standard errors in parentheses.
43
Table 7: Results in Panel Data Models
Model 1
Democracy Dummy
(Przeworski)
Model 2
Model 3
Model 4
Random Effects
Fixed Effects
Random Effects
(Dem. Dummy)
(Dem. Dummy)
(Polity Score)
0.932***
(0.273)
0.835***
(0.320)
0.043**
(0.019)
0.041*
(0.021)
Poility IV Score
Model 5
Model 6
Fixed Effects
Random Effects
Fixed Effects
(Polity Score)
(Dem. Experience) (Dem. Experience)
Established Democracies
(Dummy)
0.018***
(0.003)
0.180***
(0.034)
-0.906
(0.580)
0.091***
(0.032)
-0.039
(0.822)
-0.020
(0.039)
0.000
(0.000)
0.022***
(0.004)
0.177***
(0.038)
-0.046
(1.020)
0.071**
(0.029)
0.294
(0.860)
-0.023
(0.044)
0.000
(0.000)
0.022***
(0.004)
0.152***
(0.034)
-0.426
(0.636)
0.046
(0.030)
0.121
(0.866)
-0.030
(0.040)
0.000
(0.000)
0.026***
(0.004)
0.151***
(0.036)
0.369
(1.133)
0.030
(0.027)
0.523
(0.856)
-0.035
(0.044)
0.000
(0.000)
0.041
(0.294)
0.023***
(0.006)
0.175***
(0.062)
-2.058**
(0.914)
0.075**
(0.038)
1.382
(0.960)
-0.056
(0.056)
0.000
(0.000)
Regional Dummies
YES
NO
YES
NO
NO
NO
Decade Dummies
YES
YES
YES
YES
YES
YES
-2.191***
(0.615)
202
-2.618***
(0.620)
202
-1.831*
(1.023)
206
-2.236*
(1.163)
206
-1.051
(1.022)
132
-0.151
(0.756)
132
External debt / GNI
Short-term Debt / Reserves
Share of Debt to Private
Creditors
Inflation (log)
GDP (% deviation from
trend)
Global Interest Rate
(LIBOR)
Total Capital Flows to
Developing World
Constant
Observations
Adj. R²
0.271
0.270
-0.229
(0.290)
0.031***
(0.007)
0.108*
(0.061)
-4.637***
(1.506)
0.060*
(0.034)
2.051**
(0.992)
-0.004
(0.063)
0.000
(0.000)
0.264
Note: Fixed and Random Effects Panel Regression. Dependent variable is the index of coercive government behavior weighted through PCA. ***/**/*
denotes significance at a 1/5/10 % respectively. Robust standard errors in parentheses.
44
Table 8: Results in Heckman Selection Models
Heckman Selection Model with
Democracy Dummy
Democracy Dummy
(Przeworski)
Primary Eq.
(Coerciveness)
Selection Eq.
(Default)
1.025***
(0.261)
0.423***
(0.158)
Poility IV Score
Heckman Selection Model with
Polity Score
Primary Eq.
(Coerciveness)
Selection Eq.
(Default)
0.064***
(0.023)
0.012**
(0.006)
0.153***
(0.045)
-0.805
(0.585)
0.083***
(0.032)
-0.209
(1.050)
-0.054
(0.064)
0.000
(0.000)
0.037***
(0.012)
0.021***
(0.002)
0.119***
(0.043)
1.472***
(0.265)
0.053***
(0.019)
-1.119*
(0.641)
-0.090***
(0.028)
0.000
(0.000)
-1.442***
(0.386)
0.009*
(0.005)
0.149***
(0.040)
-1.471***
(0.534)
0.104***
(0.032)
-0.049
(0.983)
0.006
(0.059)
0.000
(0.000)
0.021***
(0.002)
0.113**
(0.044)
1.596***
(0.282)
0.071***
(0.022)
-0.987
(0.699)
-0.090***
(0.030)
0.000
(0.000)
-1.976***
(0.447)
Regional Dummies
YES
YES
YES
YES
Decade Dummies
YES
YES
YES
YES
-0.587
(1.666)
-1.442***
(0.386)
-3.136***
(0.332)
External debt / GNI
Short-term Debt /
Reserves
Share of Debt to Private
Creditors
Inflation (log)
GDP (% deviation from
trend)
Global Interest Rate
(LIBOR)
Total Capital Flows to
Developing World
Share of Bonds in Total
Debt
Share of Public External
Debt in Bond Form
Constant
Lambda
Observations
-1.976***
(0.447)
-8.552
-1.260
(0.926)
-0.437
(0.416)
1,002
0.043
(0.504)
1,200
Note: Two-Step Heckman Selection Model. The binary dependent variable in the selection equiation is debt distress,
based on the S&P criterion of default and details on the start of negotiations. The dependent variable in the primary
equiation is the index of coercive government behavior weighted through PCA.The country sample included in the
selection equation is the following: Albania, Algeria, Argentina, Armenia, Azerbaijan, Belarus, Bolivia, Brazil,
Bulgaria, Chile, Colombia, Costa Rica, Zech Rep., Dominican Rep., Ecuador, Estonia, Georgia, Hungary, India,
Kazakhstan, Kyrgyz Rep.,Latvia, Lithuania, Malaysia, Mexico, Moldova, Morocco, Nigeria, Oman, Pakistan, Panam,
Papua New Guinea, Philippines, Poland, Romania, Russia, Sri Lanka, Tajikistan, Thailand, Tunisia, Turkey,
Ukraine,Uruguay and Venezuela. ***/**/* denotes significance at a 1/5/10 % respectively.
45
Literature
Acemoglu, Daro/Johnson, Simon/Robinson, James A. 2001: The Colonial Origins of Comparative
Development: An Empirical Investigation, in: American Economic Review 91:5, pp.
1369-1401.
Aggarwal, Vinod K. 1996: Debt Games: Strategic Interaction in International Debt Rescheduling,
New York: Cambridge University Press.
Alichi, Ali 2008: A Model of Sovereign Debt in Democracies. IMF Working Paper. 08/152,
International Monetary Fund.
Andritzky, Jochen 2006: Sovereign Default Risk Devaluation - Implications of Debt Crises and
Bond Restructurings, Berlin, Heidelberg, New York: Springer.
Arendt, Hannah 1951: The Origins of Totalitarianism, New York: Harcourt: Brace Jovanovich.
Barro, Robert J. 1996: Democracy and Growth, in: Journal of Economic Growth 1:1, pp.1-27.
Beck, Thorsten/Clarke, George/Groff, Alberto/Keefer, Philip/Walsh, Patrick 2001: New Tools in
Comparative Political Economy: The database of political institutions, in: The World
Bank Economic Review 15:1, pp. 165-176.
Beim, David O./Calomiris, Charles W. 2001: Emerging Financial Markets, New York: McGrawHill.
Besley, Timothy/Kudamatsu, Masayuki 2006: Health and Democracy, in: American Economic
Review 96:2, pp. 313-318.
Borensztein, Eduardo/Panizza, Ugo 2006: Do Sovereign Defaults hurt Exporters? IADB
Working Paper 1018.
Boughton, James M. 2001: Silent Revolution: The International Monetary Fund 1979-1989,
Washington, D.C.: The International Monetary Fund.
Bueno de Mesquita, Bruce/Smith, Alastair/Siverson, Randolph M./Morrow, James D. 2003: The
Logic of Political Survival, Cambridge, MA: The MIT Press.
Clark, Gregory 1996: The Political Foundations of Modern Economic Growth, England 15401800, in: Journal of Interdisciplinary History 26:4, pp. 563-588.
Clark, William Roberts/Flores, Thomas /Kaufman, Robert 2005: What’s so good about
democracy? Working Paper. University of Michigan.
Cline, William R. 1995: International Debt Reexamined, Washington, D.C.: Institute for
International Economics.
46
Cline, William R. 2004: Private Sector Involvement in Financial Crisis Resolution: Definition,
Measurement, and Implementation, in: Haldane, Andrew (Ed.): Fixing Financial Crises in
the Twenty-first Century, London: Routledge, pp. 61-94.
Desch, Michael C. 2002: Democracy and Victory: Why Regime Type Hardly Matters, in:
International Security 27:2, pp. 5-47.
Detraigache, Enrica/Spilimbergo, Antonio 2001: Crises and Liquidity: Evidence and
Interpretation, in: IMF Working Paper 01:2.
Drake, Paul 1989: Debt and Democracy in Latin America, 1920s-1980s. In: Barbara
Stalling/Robert Kaufman (Eds.); Debt and Democracy in Latin America. Boulder, Co:
Westview Press, pp. 39-58.
Drazen, Allan 1998: Towards a Political Economic Theory of Domestic Debt, in: Calvo,
Guillermo/King, Mervyn (Eds.): The Debt Burden and Its Consequences for Monetary
Policy, London: Macmillan, pp. 159-176.
Enderlein, Henrik/Müller, Laura/Trebesch, Christoph 2008: Sovereign Debt Disputes. Testing
the Role of Politics and Institutions in Financial Crisis Resolution (Political Economy of
International Finance Workshop, Claremont, CA, May 2008).
Epstein, Stephan R. 2000: Freedom and Growth: The Rise of States and Markets in Europe,
1300- 1750, London: Routledge.
Epstein, David L./ Bates, Robert /Goldstone, Jack /Kristensen, Ida/O’Halloran, Sharyn 2006:
Democratic Transitions, in: American Journal of Political Science 50:3, pp.551-569.
Eyerman, Joe/Hart, Robert A. Jr. 1996: An Empirical Test of the Audience Cost Proposition:
Democracy Speaks Louder than Words, in: The Journal of Conflict Resolution 40:4, pp.
597-616.
Fearon, James D. 1994: Domestic Political Audiences and the Escalation of International
Disputes, in: The American Political Science Review 88:3, pp. 577-592.
Fostel, Ana /Kaminsky, Graciela L. 2007: Latin America’s Access to International Capital
Markets: Good Behavior or Global Liquidity?, in: Cowan, Kevin/Edwards, Sebastian
/Valdés, Rodrigo (Eds.): Current Account and External Financing, Santiago de Chile:
Central Bank of Chile.
Frankel, Jeffrey A./Roubini, Nouriel 2001: The Role of Industrial Country Policies in Emerging
Market Crises, in: NBER Working Paper Series 8634, pp. 1-110.
Freedom House 2006: Annual Survey of Freedom Country Scores, 1972-73 to 1999-06, retrieved
from: http://www.freedomhouse.org (2008-08-07).
Frechette, G. 2001a: Random-effects ordered probit, Stata Technical Bulletin 59,
23-27. Reprinted in Stata Technical Bulletin Reprints 10, 261-266.
47
Frechette, G. 2001b: Update to random-effects ordered probit, StataTechnical Bulletin 61, 12.
Reprinted in Stata Technical Bulletin Reprints 10, 266- 267.
Frieden, Jeffrey 1988: Classes, Sectors, and Foreign Debt in Latin America, in: Comparative
Politics 21:1, pp. 1-20.
Frieden, Jeffrey 1989: Winners and Losers in the Latin American Debt Crisis: The Political
Implications. In: Barbara Stalling/Robert Kaufman (Eds.); Debt and Democracy in Latin
America. Boulder, Co: Westview Press, pp. 39-58.
Geddes, Barbara 2004: Authoritarian Breakdowns. NEW Working Paper. University of
California Los Angeles.
Gelos, Gaston/Sahay, Ratna /Sandleris, Guido 2004: Sovereign Borrowing by Developing.
Countries: What Determines Market Access?, in: IMF Working Papers 04:221.
Gelpi, Christopher F./Griesdorf, Michael 2001: Winners or Losers? Democracies in International
Crisis, 1918-94, in: The American Political Science Review 95:3, pp. 633-647.
Glaeser, Edward L./La Porta, Rafael/Lopez-De-Silanes, Florencio/Shleifer, Andrei 2004: Do
Institutions Cause Growth?in: Journal of Economic Growth , pp. 271-303.
Haggard, Stephan/Kaufman, Robert (Eds.) 1992: The Politics of Economic Adjustment+
Princeton, N.J.: Princeton University Press.
Haggard, Stephan/Kaufman, Robert1995: The Political Economy of Democratic Transitions+
Princeton, N.J.: Princeton University Press.
Haggard, Stephan/Webb, Steven (Eds.) 1994: Voting for Reform: Democracy, Political
Liberalization, Distributive Conflicts, and Economic Adjustment. New York: Oxford
University Press.
Hatchondo, Juan Carlos/Martinez, Leonardo/ Sapriza, Horacio 2007: The Economics of
Sovereign Defaults, in: Economic Quarterly 93(2), pp.163-187.
Heckman, James J. 1979: Sample Selection Bias as a Specification Error, in: Econometrica 47:1,
pp. 153–161.
Henisz, Witold J. 2000: The Institutional Environment for Economic Growth, in: Economics and
Politics 12:1, pp. 1-31.
Hirschman, Albert O. 1987: The political economy of Latin American development: Seven
exercises in retrospection. Latin American Research Review 22: pp.7-36.
IIF 2006: Principles for Stable Capital Flows and Fair Debt Restructuring In Emerging Markets.
Report on Implementation by the Principles Consultative Group, Washington, D.C.
IMF 1999: IMF Policy on Lending into Arrears to Private Creditors, Washington, D.C.
48
IMF 2002: Fund Policy on Lending into Arrears to Private Creditors—Further Consideration of
the Good Faith Criterion, Washington, D.C.
Jaggers, Keith/ Gurr, Ted Robert 1995: Tracking Democracy’s Third Wave with the Polity III
Data. Journal of Peace Research 32: 4, pp. 469 -82.
Jensen, Nathan M. 2003: Democratic Governance and Multinational Corporations: Political
Regimes and Inflows of Foreign Direct Investment, in: International Organization 57:3,
pp. 587-616.
Jensen, Nathan M. 2008: Political Risk, Democratic Institutions, and Foreign Direct Investment,
forthcoming in: Journal of Politics 70: 4.
Jolliffe, Ian T. 2002: Principal Component Analysis, New York: Springer.
Kaufman, Robert R. 1985: Democratic and Authoritarian Responses to the Debt Issue: Argentina,
Brazil, Mexico, in: International Organization 39:3, pp. 473-503.
Kaufman, Robert R. 1986: Democratic and Authoritarian Responses to the Debt Issue: Argentina,
Brazil, Mexico. In: Miles Kahler (Ed.) The Politics of International Debt. Ithaca: Cornell
University Press, pp. 187-217.
Kohlscheen, Emanuel 2007: Why are there Serial Defaulters? Evidence from Constitutions, in:
The Journal of Law and Economics 50:4, pp. 713-730.
Kraay, Aart/Nehru, Vikram 2004: When Is External Debt Sustainable?, in: World Bank Policy
Research Working Paper 3200.
Lake, David A. 1992: Powerful Pacifists: Democratic States and War, in: The American Political
Science Review 86:1, pp. 24-37.
Leblang, David 2005: Pegs and Politics. Paper presented at the 2005 Meeting of the American
Political Science Association, Washington, DC.
Lektzian, David/Souva, Mark 2003: The Economic Peace Between Democracies: Economic
Sanctions and Domestic Institutions. Journal of Peace Research 40(6), pp. 641–660.
Linz, Juan 1978: Crisis, breakdown, and reequilibration. In: Juan Linz/Alfred Stepan (Eds.),The
breakdown of democratic regimes. Baltimore: Johns Hopkins University Press, pp. 3-124.
Linz, Juan J./Stepan, Alfred 1996: Problems of democratic transition and consolidation: Southern
Europe, South America, and post-communist Europe. Baltimore: Johns Hopkins
University Press.
Manasse, Paolo/Roubini, Nouriel/Schimmelpfennig, Axel 2003: Predicting Sovereign Debt
Crises, in: IMF Working Paper 03:221.
49
Mansfield, Edward D./Milner, Helen V./Rosendorff, B. Peter 2002: Why Democracies Cooperate
More: Electoral Control and International Trade Agreements, in: International
Organization 56:3, pp. 477-513.
Mansfield, Edward D./Snyder, Jack 2002: Democratic Transitions, Institutional Strength, and
War, in: International Organization 56: 2, pp. 297-337.
Marchesi, Silvia 2003: Adoption of an IMF Programme and Debt Rescheduling. An Empirical
Analysis, in: Journal of Development Economics 70:2, pp. 403-423.
McGillivray, Fiona/Smith, Alastair 2008: Punishing the Prince: A Theory of Interstate Relations,
Political Institutions, and Leader Change. Princeton: Princeton University Press.
Munck, Gerardo L./Verkuilen, Jay 2002: Conceptualizing and Measuring Democracy: Evaluating
Alternative Indices, in: Comparative Political Studies 35:1, pp. 5-34.
North, Douglass C./Weingast, Barry R. 1989: Constitutions and Commitment: The Evolution of
Institutional Governing Public Choice in Seventeenth-Century England, in: The Journal
of Economic History 49:4, pp. 803-832.
O’Donnell, Guillermo 1978: Reflections on the Patterns of Change in the BureaucraticAuthoritarian State, in: Latin American Research Review 13:1, pp. 3-38.
Oneal, John R. 1994: The Affinity of Foreign Investors for Authoritarian Regimes, in: Political
Research Quarterly 47:3, pp. 565-588.
Olson, Mancur 1991: Autocracy, Democracy, and Prosperity, in: Zeckhauser, Richard (Ed.):
Strategy and Choice, Cambridge, MA: MIT Press., pp. 131-157.
Panizza, Ugo/Sturzenegger, Federico/Zettelmeyer, Jeromin 2008: The Economics and Law of
Sovereign Debt and Default. Washington, D.C.: IMF Working Paper.
Partell, Peter J./Palmer, Glenn 1999: Audience Costs and Interstate Crises: An Empirical
Assessment of Fearon's Model of Dispute Outcomes, in: International Studies Quarterly
43:2, pp. 389-405.
Pescatori, Andrea/Sy, Amadou N. R. 2007: Are Debt Crises Adequately Defined?, in: IMF Staff
Papers 54:2, pp. 306-337.
Przeworski, Adam/Alvarez, Michael E./Cheibub, José Antonio/Limongi, Fernando 2000:
Democracy and Development. Political Institutions and Well-Being in the World, 1950–
1990, Cambridge: Cambridge University Press.
Remmer, Karen L. 1990: Democracy and Economic Crisis: The Latin American Experience.
World Politics, 42:3, pp. 315-335.
Rabe-Hesketh, Sophia/Pickles, Andrew/Taylor, Colin 2000: Generalized linear latent and mixed
models, in: Stata Technical Bulletin 53, pp. 47-57.
50
Reinhart, Carmen M./Rogoff, Kenneth S. 2008: This Time is Different: A Panoramic View of
Eight Centuries of Financial Crises, in: NBER Working Paper 13882.
Reinhart, Carmen M./Rogoff, Kenneth/Savastano, Miguel A. 2003: Debt Intolerance, in:
Brookings Papers on Economic Activity 1, pp. 1-70.
Rieffel, Lex 2003: Restructuring Sovereign Debt: The Case for Ad Hoc Machinery, Washington,
D.C.: Brookings Institution Press.
Rodrik, Dani/Wacziarg,Romain 2005: Do Democratic Transitions Produce Bad Economic
Outcomes? In: American Economic Review 95: 2, p.50-55.
Van Rijckeghem, Caroline/Weder, Beatrice 2004: The Politics of Debt Crises, in: CEPR
Discussion Paper Series 4683, pp. 1-42.
Robinson, James A. 1998: Debt Repudiation and Risk Premia: The North-Weingast Thesis
Revisited, in: Harvard University, Weatherhead Center for International Affairs, retrieved
from: http://www.wcfia.harvard.edu/node/785 (2008-08-07).
Roubini, Nouriel 2004: Private Sector Involvement in Crisis Resolution and Mechanisms for
Dealing with Sovereign Debt Problems, in: Haldane, Andrew (Ed.): Fixing Financial
Crises in the Twenty-First Century, London: Routledge.
Roubini, Nouriel/Setser, Brad 2004: Bailouts or Bail-ins? : Responding to Financial Crises in
Emerging Economies, Washington, D.C.: Institute for International Economics.
Saiegh, Sebastian M. 2005: Do Countries have a Democratic Advantage? Political Institutions,
Multilateral Agencies, and Sovereign Borrowing, in: Comparative Political Studies 38:4,
pp. 366-387.
Schultz, Kenneth A./Weingast, Barry R. 2003: The Democratic Advantage: Institutional
Foundations of Financial Power in International Competition, in: International
Organization 57:1, pp. 3-42.
Slantchev, Branislav L. 2004: The Watchful Eye: Information Transmission and Political Failure,
in: Univ. of California San Diego Working Paper September 9.
Standard & Poor's 2006: Default Study: Sovereign Defaults At 26-Year Low, To Show Little
Change In 2007 (Sep 18, 2006).
Stasavage, David 2007: Cities, Constitutions, and Sovereign Borrowing in Europe, 1274–1785,
in: International Organization 61:3, pp. 489-525.
Stokes, Susan (Ed.) 2001: Public Support for Market Reforms in New Democracies New York:
Cambridge University Press.
Sturzenegger, Federico/Zettelmeyer, Jeromin 2006: Debt Defaults and Lessons from a Decade of
Crises, Cambridge, MA: The MIT Press.
51
Sussman, Nathan/Yafeh, Yishay 2006: Constitutions and Commitment: Evidence on the Relation
Between Institutions and the Cost of Capital, in: Journal of Economic History 66:4, pp.
906-935.
Suter, Christian 1992: Debt Cycles in the World-Economy. Foreign Loans, Financial Crises, and
Debt Settlements, 1820-1990, Oxford: Westview Press.
Tomz, Michael 2002: Democratic Default: Domestic Audiences and Compliance with
International Agreements (Annual Meeting of the American Political Science
Association, Boston, August 29 - September 1, 2002).
Tomz, Michael 2007a: Reputation and International Cooperation: Sovereign Debt across Three
Centuries, Princeton, NJ: Princeton University Press
Tomz, Michael 2007b: Domestic Audience Costs in International Relations: An Experimental
Approach, in: International Organization 61, Fall 2007, pp. 821-40.
Tullock, Gordon 1987: Autocracy, Dordrecht, The Netherlands: Kluwer Academic Publishers.
Vollmer, Sebastian/Ziegler, Maria 2008: Political Institutions and Human Development Does
Democracy Fulfill its “Constructive” and “Instrumental” Role?, unpublished manuscript,
Georg-August-University Göttingen.
Williamson, John/Haggard, Stephan 1994: The Political Conditions for Economic Reform. In:
J.ohn Williamson (Ed.): The Political Economy of Policy Reform. Washington, D.C.:
Institute for International Economics, pp.527-596.
World Bank 2002: Global Development Finance, Washington, D.C.
World Bank 2003: Global Development Finance, Washington, D.C.
52