Do Countries Have a “Democratic Advantage”?

Abstract

This article examines the effect of political institutions on countries’ risk characteristics and the role that domestic political institutions play in determining the interest rates charged to less developed countries. According to the “democratic advantage” argument, democracies should pay lower interest rates than authoritarian regimes because they are better able to make credible commitments. The author argues that such a claim must be revised in the case of developing countries. The results presented in this article support this assertion. First, they show that democracies are more likely to reschedule their debts, so they have no advantage; rather, the opposite is true. Second, there does not appear to be a significant difference between the interest rates paid by democracies and nondemocracies.