Sovereign Credit and the Fate of Leaders: Reassessing the “Democratic Advantage”

Abstract

In this article, we contend that the "democratic advantage" literature (i) exaggerates the potential political backlash from credit downgrades in democracies; and (ii) overlooks the importance of sovereign credit to nondemocratic leaders. We argue that nondemocratic regimes receive a higher marginal political benefit from credit compared to democratic regimes. Consequently, changes in credit prices or credit access affect nondemocratic leaders' tenure more than democratic leaders' tenure. To test this argument, we provide the first statistical examination of the electoral punishment mechanism of the "democratic advantage." Our duration analysis shows that credit downgrades increase nondemocratic leaders' vulnerability more than that of their democratic peers. Our research reinforces the growing concerns about the conventional views about regime type, domestic constraints, and leaders' preferences toward sovereign credit and other political processes.

Borrowed Time: Sovereign Finance, Regime Type, and Leader Survival

“…This component of our argument is consistent with Wintrobe, whose political economy approach to dictators' allocation decisions demonstrates that fiscal policy favors small, elite groups in non-democratic regimes (Wintrobe, 1998). There are numerous 8 DiGiuseppe and Shea (2015) use a similar argument to argue that changes in creditworthiness will affect the political survival of non-democracies leaders more than democratic leaders. examples that demonstrate this fiscal logic, including the Marcos regime in the Philippines, military regimes in Latin America in the 1970s, the Duvaliers in Haiti, and the South African apartheid system (Wintrobe, 1998).…”

“… DiGiuseppe and Shea () use a similar argument to argue that changes in creditworthiness will affect the political survival of non‐democracies leaders more than democratic leaders. …”

Financial Data Transparency, International Institutions, and Sovereign Borrowing Costs

“…This work has spurred a sub-literature on how political regime type a↵ects the political consequences of defaulting and politicians' willingness to repay (e.g. Beaulieu et al, 2012;DiGiuseppe and Shea, 2015;Saiegh, 2005). More recently authors have highlighted the political incentives that democratic politicians may have not to repay (e.g.…”

“…More recently authors have highlighted the political incentives that democratic politicians may have not to repay (e.g. DiGiuseppe and Shea, 2015;Walter, 2013). Still others focus on the importance of elections (e.g.…”

Political clout of government bondholders

“…Specifically, democracies can borrow money at a cheaper rate because they send a credible signal to loaners that they will service their debt responsibly (Dincecco 2009;North and Weingast 1989;Schultz and Weingast 2003). However, as recent studies have demonstrated that there is little difference between the abilities of democracies and autocracies to borrow money, such a democratic advantage holds only under particular conditions (Archer et al 2007;DiGiuseppe and Shea 2015;Saiegh 2005). 26 For these conflicting reports, I do not exclude this political variable in the first place.…”