IDEAS home Printed from https://ideas.repec.org/p/cdi/wpaper/1547.html
   My bibliography  Save this paper

How does external debt impact democratization? Evidence from developing countries

Author

Listed:
  • Rasmané OUEDRAOGO
  • Jean-Louis COMBES

    (Centre d'Etudes et de Recherches sur le Développement International(CERDI))

Abstract

In this paper we empirically discuss whether or not external debt affects country’s governance. Indeed, indebted countries need some political governance reforms in order to send out a positive signal to international financial community and investors; and so improving business climate. However, external debt reduces their flexibility and ability to address associated costs to political governance. Our study focuses on the period 1985-2011 and spans 103 developing countries. To deal with endogeneity issue, we first lag external debt by one year and second propose two-step tobit estimator by instrumenting external debt-to-GDP ratio with real effective exchange rate. Even controlling for various conventional determinants of democratic transitions, we find that external debt constraints indebted countries to move up democracy scale but incite governments to improve investment profile and therefore improving business climate. Furthermore, Heavily Indebted Poor Countries (HIPC) initiative and International Monetary Fund (IMF) programs dampen the negative effect of debt on democratic transitions.

Suggested Citation

  • Rasmané OUEDRAOGO & Jean-Louis COMBES, 2014. "How does external debt impact democratization? Evidence from developing countries," Working Papers 201408, CERDI.
    • Handle: RePEc:cdi:wpaper:1547
    as

    Download full text from publisher

    File URL: http://publi.cerdi.org/ed/2014/2014.08.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, vol. 9(2), pages 131-165, June.
    2. Panizza, Ugo & Presbitero, Andrea F., 2014. "Public debt and economic growth: Is there a causal effect?," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 21-41.
    3. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 1999. "The Quality of Government," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 15(1), pages 222-279, April.
    4. Daron Acemoglu & Simon Johnson & James A. Robinson & Pierre Yared, 2008. "Income and Democracy," American Economic Review, American Economic Association, vol. 98(3), pages 808-842, June.
    5. Levy, Brian & Spiller, Pablo T, 1994. "The Institutional Foundations of Regulatory Commitment: A Comparative Analysis of Telecommunications Regulation," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(2), pages 201-246, October.
    6. Benno Torgler & Friedrich Schneider, 2007. "What Shapes Attitudes Toward Paying Taxes? Evidence from Multicultural European Countries," Social Science Quarterly, Southwestern Social Science Association, vol. 88(2), pages 443-470, June.
    7. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    8. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," Journal of Economic Growth, Springer, vol. 9(3), pages 271-303, September.
    9. Eicher, Theo S. & Schubert, Stefan F. & Turnovsky, Stephen J., 2008. "Dynamic effects of terms of trade shocks: The impact on debt and growth," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 876-896, October.
    10. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
    11. Deshpande, Ashwini, 1997. "The debt overhang and the disincentive to invest," Journal of Development Economics, Elsevier, vol. 52(1), pages 169-187, February.
    12. Neumayer, Eric, 2002. "Is Good Governance Rewarded? A Cross-national Analysis of Debt Forgiveness," World Development, Elsevier, vol. 30(6), pages 913-930, June.
    13. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    14. Kirchler, Erich & Hoelzl, Erik & Wahl, Ingrid, 2008. "Enforced versus voluntary tax compliance: The "slippery slope" framework," Journal of Economic Psychology, Elsevier, vol. 29(2), pages 210-225, April.
    15. repec:bla:jfinan:v:43:y:1988:i:2:p:271-81 is not listed on IDEAS
    16. Lipset, Seymour Martin, 1959. "Some Social Requisites of Democracy: Economic Development and Political Legitimacy1," American Political Science Review, Cambridge University Press, vol. 53(1), pages 69-105, March.
    17. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    18. North, Douglass C., 1989. "Institutions and economic growth: An historical introduction," World Development, Elsevier, vol. 17(9), pages 1319-1332, September.
    19. Evelyne Huber & Dietrich Rueschemeyer & John D. Stephens, 1993. "The Impact of Economic Development on Democracy," Journal of Economic Perspectives, American Economic Association, vol. 7(3), pages 71-86, Summer.
    20. Lane, Philip & Milesi-Ferretti, Gian Maria, "undated". "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    21. Gasiorowski, Mark J., 1995. "Economic Crisis and Political Regime Change: An Event History Analysis," American Political Science Review, Cambridge University Press, vol. 89(4), pages 882-897, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bougharriou, Nouha & Benayed, Walid & Gabsi, Foued Badr, 2022. "Democratic transition and fiscal policy in the Arab world," Economic Systems, Elsevier, vol. 46(2).
    2. Bougharriou, Nouha & Benayed, Walid & Gabsi, Foued Badr, 2018. "How does democracy affect public debt? Evidence from the Arab world," Economics Discussion Papers 2018-54, Kiel Institute for the World Economy (IfW Kiel).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Freytag, Andreas & Pehnelt, Gernot, 2009. "Debt Relief and Governance Quality in Developing Countries," World Development, Elsevier, vol. 37(1), pages 62-80, January.
    2. Frankel, Jeffrey A. & Vegh, Carlos A. & Vuletin, Guillermo, 2013. "On graduation from fiscal procyclicality," Journal of Development Economics, Elsevier, vol. 100(1), pages 32-47.
    3. Kangoye, Thierry, 2011. "Does Foreign Aid Promote Democracy?," WIDER Working Paper Series 064, World Institute for Development Economic Research (UNU-WIDER).
    4. Sunde, Uwe & Fortunato, Piergiuseppe & Cervellati, Matteo, 2011. "Democratization and Civil Liberties: The Role of Violence During the Transition," CEPR Discussion Papers 8315, C.E.P.R. Discussion Papers.
    5. Duha Altindag & Naci Mocan, 2010. "Joblessness and Perceptions about the Effectiveness of Democracy," Journal of Labor Research, Springer, vol. 31(2), pages 99-123, June.
    6. Thierry Kangoye, 2011. "Does Foreign Aid Promote Democracy?," WIDER Working Paper Series wp-2011-064, World Institute for Development Economic Research (UNU-WIDER).
    7. Ezcurra, Roberto & Zuazu, Izaskun, 2019. "Political equality and quality of government," MPRA Paper 96476, University Library of Munich, Germany.
    8. Roberto Ezcurra & Izaskun Zuazu, 2022. "Political equality and quality of government," Kyklos, Wiley Blackwell, vol. 75(2), pages 269-293, May.
    9. Matteo Cervellati & Piergiuseppe Fortunato & Uwe Sunde, 2008. "Hobbes to Rousseau: Inequality, Institutions and Development," Economic Journal, Royal Economic Society, vol. 118(531), pages 1354-1384, August.
    10. Fedderke, Johannes & Klitgaard, Robert, 2013. "How Much Do Rights Matter?," World Development, Elsevier, vol. 51(C), pages 187-206.
    11. Robert MacCulloch & Silvia Pezzini, 2010. "The Roles of Freedom, Growth, and Religion in the Taste for Revolution," Journal of Law and Economics, University of Chicago Press, vol. 53(2), pages 329-358, May.
    12. Haichao Fan & Xiang Gao, 2017. "Domestic Creditor Rights and External Private Debt," Economic Journal, Royal Economic Society, vol. 127(606), pages 2410-2440, November.
    13. Torsten Persson & Guido Tabellini, 2009. "Democratic Capital: The Nexus of Political and Economic Change," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(2), pages 88-126, July.
    14. Doris A. Oberdabernig & Stefan Humer & Jesus Crespo Cuaresma, 2018. "Democracy, Geography and Model Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 65(2), pages 154-185, May.
    15. Papaioannou, Elias & Siourounis, Gregorios, 2008. "Economic and social factors driving the third wave of democratization," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 365-387, September.
    16. Bhattacharyya, Sambit, 2009. "Institutions, diseases, and economic progress: a unified framework," Journal of Institutional Economics, Cambridge University Press, vol. 5(1), pages 65-87, April.
    17. Desbordes, Rodolphe & Koop, Gary, 2016. "Should we care about the uncertainty around measures of political-economic development?," Journal of Comparative Economics, Elsevier, vol. 44(3), pages 752-763.
    18. Méon, Pierre-Guillaume & Sekkat, Khalid, 2022. "A time to throw stones, a time to reap: how long does it take for democratic transitions to improve institutional outcomes?," Journal of Institutional Economics, Cambridge University Press, vol. 18(3), pages 429-443, June.
    19. Céline Azémar & Rodolphe Desbordes, 2009. "Public Governance, Health and Foreign Direct Investment in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies, vol. 18(4), pages 667-709, August.
    20. Richard Bluhm & Adam Szirmai, 2011. "Institutions, Inequality and Growth: A review of theory and evidence on the institutional determinants of growth and inequality," Papers inwopa634, Innocenti Working Papers.

    More about this item

    Keywords

    External debt; Governance; Democracy; Democratic transitions; Crisis; Investment;
    All these keywords.

    JEL classification:

    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification
    • P52 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Studies of Particular Economies
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cdi:wpaper:1547. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Vincent Mazenod (email available below). General contact details of provider: https://edirc.repec.org/data/ceauvfr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.