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Commodity Windfalls, Democracy, and External Debt

Author

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  • Rabah Arezki

    () (International Monetary Fund (IMF))

  • Markus Bruckner

    () (School of Economics, University of Adelaide)

Abstract

We examine the effects that revenue windfalls from international commodity price booms have on external debt in a panel of 93 countries during the period 1970-2007. Our main finding is that increases in the international prices of exported commodity goods lead to a significant reduction in the level of external debt in democracies, but to no significant reduction in the level of external debt in autocracies. To explain this result, we show that in autocracies commodity windfalls lead to a statistically significant and quantitatively large increase in government expenditures. In democracies on the other hand government expenditures did not increase significantly. We also document that following commodity windfalls the risk of default on external debt decreased in democracies, but increased significantly in autocracies.

Suggested Citation

  • Rabah Arezki & Markus Bruckner, 2011. "Commodity Windfalls, Democracy, and External Debt," School of Economics Working Papers 2011-03, University of Adelaide, School of Economics.
  • Handle: RePEc:adl:wpaper:2011-03
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    File URL: http://www.economics.adelaide.edu.au/research/papers/doc/wp2011-03.pdf
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    Keywords

    commodity windfalls; debt; political institutions;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)

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