Political Institutions and Foreign Debt in the Developing World

Abstract

Why did some developing country governments accumulate large foreign debt burdens in the late twentieth century while others did not? I hypothesize that variation in foreign indebtedness is a product of the impact of regime type on government borrowing and investment decisions. Autocratic regimes will borrow more from foreign lenders and invest fewer of these funds in public goods than democratic regimes. Consequently, autocracies are more likely to develop large foreign debt burdens than democracies. I test this hypothesis by estimating error correction models against a sample comprising 78 developing countries between 1976 and 1998. The analysis suggests that autocratic governments accumulated substantially larger foreign debt relative to their national income than democratic governments. The analysis has implications for the likely consequences of contemporary debt relief initiatives.