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External Debt, Capital Flight and Political Risk

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Author Info
Alberto Alesina
Guido Tabellini

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Abstract

This paper provides an explanation of the simultaneous occurrence of large accumulation of external debt, private capital outflow and relatively low domestic capital formation in developing countries. We consider a general equilibrium model in which two types of government with conflicting distributional goals randomly alternate in office. Uncertainty over the fiscal policies of future governments generates private capital flight and small domestic investment. This political uncertainty also provides the incentives for the current government to over accumulate external debt. The model also predicts that left wing governments are more inclined to impose restrictions on capital outflows than right wing governments. Finally, we examine how political uncertainty affects the risk premium charged by lenders and how debt repudiation may occur after a change of political regime.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2610.

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Date of creation: Jun 1988
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Publication status: published as Journal of International Economics, Vol. 27, No. 4, pp. 199-220, November 1989.
Handle: RePEc:nbr:nberwo:2610

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Alberto Alesina, 1987. "A Positive Theory of Fiscal Deficits and Government Debt in a Democracy," UCLA Economics Working Papers 435, UCLA Department of Economics. [Downloadable!]
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  2. Eaton, Jonathan, 1987. "Public Debt Guarantees and Private Capital Flight," World Bank Economic Review, Oxford University Press, vol. 1(3), pages 377-95, May.
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  3. Andrew Berg & Jeffrey Sachs, 1988. "The Debt Crisis: Structural Explanations of Country Performance," NBER Working Papers 2607, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Fischer, Stanley, 1980. "Dynamic inconsistency, cooperation and the benevolent dissembling government," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 93-107, May. [Downloadable!] (restricted)
  5. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-97, December. [Downloadable!] (restricted)
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  6. Sebastian Edwards, 1987. "Structural Adjustment Policies in Highly Indebted Countries," UCLA Economics Working Papers 453, UCLA Department of Economics. [Downloadable!]
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  7. Joshua Aizenman, 1990. "Investment, Openness, and Country Risk," NBER Working Papers 2410, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Jonathan Eaton & Mark Gersovitz, 1987. "Country Risk and the Organization of International Capital Transfer," NBER Working Papers 2204, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. R. Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," Working papers 347, Massachusetts Institute of Technology (MIT), Department of Economics.
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  10. Alesina, Alberto, 1988. "Credibility and Policy Convergence in a Two-Party System with Rational Voters," American Economic Review, American Economic Association, vol. 78(4), pages 496-805, September.
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