Kohlscheen, Emanuel (2006) Why are there serial defaulters? Evidence from constitutions. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers).

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Abstract

Presidential democracies were 4.9 times more likely to default on external debts between 1976 and 2000 than parliamentary democracies. This paper argues that the explanation to the pattern of serial defaults among a number of sovereign borrowers lies in their constitutions. Ceteris paribus, parliamentary democracies are less likely to default on their liabilities as the confidence requirement creates a credible link between economic policies and the political survival of the executive. This link tends to strengthen the repayment commitment when politicians are opportunistic. I show that this effect is large and statistically significant in the contemporary world even when comparison is restricted to countries that are twins in terms of colonial origin, geography and economic variables. Moreover, the result persists if OECD or Latin American democracies are excluded from the sample. Since the form of government of a country is typically chosen at the time of independence and highly persistent over time, constitutions can explain why debt policies in developing countries are related to individual histories.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HJ Public Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Debts, Public, Default (Finance), Finance, Public, Democracy -- Economic aspects, Constitutions
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	2006
Number:	No.755
Number of Pages:	33
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Economic and Social Research Council (Great Britain) (ESRC)
References:	DETRAGIACHE, E., SPILIMBERGO, A. (2000) Crises and liquidity: evidence and interpretation. IMF Working Paper 2/2001. ECKSTEIN, H., GURR, T. (1975) Patterns of authority: a structural basis for political inquiry. New York: Wiley Interscience. GLAESER, E., LAPORTA, R., LOPEZ-DE-SILLANEZ, F., SHLEIFER, A. (2004) Do institutions cause growth? Journal of Economic Growth 9, 271-303. JONES, C. (1999) Why do some countries produce so much more output per worker than others? Quarterly Journal of Economics 114, 83-116. KOHLSCHEEN, E. (2004) Essays on Debts and Constitutions. IIES, Stockholm - Monograph series nr. 47 LINDERT, P., MORTON, P. (1989) How sovereign debt has worked. In Sachs, J. (ed.) Developing country debt and economic performance: the world financial system. University of Chicago Press, 39-106. NORTH, D. (1981) Structure and change in economic history. Norton and Co. NORTH, D., WEINGAST, B. (1989) Constitutions and commitment: the evolution of institutions governing public choice in seventeenth-century England. The Journal of Economic History XLIX, 4, 803-832. PERSSON, T., TABELLINI, G. (2002) Do constitutions cause large governments? Quasi-experimental evidence. European Economic Review 46, 908-918. PERSSON, T., TABELLINI, G. (2003) The economic effects of constitutions. Cambridge: MIT Press. REINHART, C.M., ROGOFF, K.S., SAVASTANO, M.A. (2003) Debt intolerance. Brooking Papers on Economic Activity, 1, 1-62. REINHART, C.M., ROGOFF, K.S. (2004) Serial default and the "paradox" of rich to poor capital flows. American Economic Review, 94, 2, 53-58. ROSENBAUM, P., RUBIN, D. (1983) The central role of the propensity score in observational studies for causal effects. Biometrika 70, 41-55. SUMMERHILL, W.R. (2005) Political economics of the domestic debt in nineteenth-century Brazil. Mimeo, UCLA. SUTER, C. (1990) Schuldenzyklen in der Dritten Welt. Frankfurt am Main: Hain. WACZIARG, R. (1996) Information to create colonization dummies. Harvard University, Cambridge-MA, mimeo. DATA SOURCES col_uk: indicator of whether a country was colonized by the UK. Wacziarg (1996) and Persson and Tabellini (2003). col_uka: col_uk*(250 - t_indep)/250. Wacziarg (1996). default indicator: Standard and Poor’s. eurfrac: fraction of population speaking English, French, German, Spanish or Portuguese as first language. For new democracies that were formed through secession, linguistic data of the country from which the secession occurred were imputed. Hall and Jones (1999). latitude: latitude of the capital city of the country divided by 90. Hall and Jones (1999). parliamentary dummy: indicator of whether the executive needs the confidence of the legislature to remain in power. Persson and Tabellini (2003). Lebanon, Morocco and Panama were classified as having a presidential form of government. per capita income, GDP growth, interest payments/revenues, debt/GNP, international reserves/imports: WDI database. Central government debt data were complemented with data from the OECD yearbook (sample period averages). openness: from the WDI database (WDI. NE.TRD.GNFS.ZS–Trade (% of GDP) ). substantial default indicator: Detragiache and Spilimbergo (2001). t_indep: number of years since independence of the country.
URI:	http://wrap.warwick.ac.uk/id/eprint/1441

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