The effects of bond ratings on income inequality in the developing world

Although the effects of globalization on income inequality has received much attention, missing from the discussion is the role played by credit rating agencies (CRAs) on income inequality. Using a sample of seventy developing countries from 1990–2015, we find that bond ratings have significant, yet indirect, effects on income inequality. We see that interest rate spreads, and to a lesser degree tax, labor, and monetary policies, mediate the relationship between ratings and income inequality. Specifically, developing countries receiving bond downgrades observe a rise in interest rate spreads. Countries with higher interest rate spreads tend to have less available credit, which reduces output and production, promoting surplus labor and its consequences for those at the bottom of the income distribution. Bond downgrades also compel developing countries to pursue neoliberal reforms, endorsed by the CRAs, in an attempt to lift their ratings. The effects of tax, labor, and monetary policies, in particular, appear to enlarge disparities between the rich and the poor. Our research helps to identify the mechanism by which CRAs and globalization, more generally, impact wealth disparities in the developing world.