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Why are there serial defaulters? Evidence from constitutions

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Kohlscheen, Emanuel (2006) Why are there serial defaulters? Evidence from constitutions. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.755).

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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

Official Date:

2006

Dates:

Date	Event
2006	Published

Number:

No.755

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

Funder:

Economic and Social Research Council (Great Britain) (ESRC)

References:

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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.