Institutional Quality and Sovereign Flows

This paper evidences the relevance of mercantilism and sudden stops in emerging’market economies as a joint explanation for positive net public foreign assets, while political-economy frictions account for the varying degrees that asset accumulation is achieved across economies with similar characteristics. An increase of 50 percent in these frictions implies a reduction of almost 20 percentage points of GDP in net foreign public assets, in the context of economies with growth externalities, therefore a motive for mercantilism exists. In its absence, on the other hand, the sovereigns accumulate net foreign liabilities, which makes their access to international markets more infrequent. In a model without mercantilist motives, political-economy frictions explain less of the differences in net foreign positions (5 percentage points of GDP), but can explain great differences in sovereign risk: a reduction of 70 percent in politicaleconomy frictions can reduce the sovereign spread by 800 basis points.