The Social Costs of Sovereign Default

This paper investigates the economic and social consequences of sovereign default on external debt. We focus on the crises’ impact on real per capita GDP, infant mortality, life expectancy, poverty headcounts, and calorie supply per capita. After methodological exclusions, the sample covers 221 default episodes over 1815-2020. The analysis adopts an eclectic empirical strategy that relies on an augmented synthetic control method and local projections. Our findings suggest that sovereign defaults lead to significant adverse economic outcomes, with defaulting economies falling behind their counterparts by a cumulative 8.5 percent of GDP per capita within three years of default. Moreover, output per capita remains nearly 20 percent below that of non-defaulting peers after a decade. Based on the trajectory of the health, nutrition, and poverty indicators we study, we assess that the social costs of sovereign default are significant, broad-based, and long-lived.