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Sovereign defaults and expropriations : empirical regularities

  • Eden, Maya
  • Kraay, Aart
  • Qian, Rong

This paper uses a large cross-country dataset to empirically examine factors associated with sovereign defaults on external private creditors and expropriation of foreign direct investments in developing countries since the 1970s. In the long run, sovereign defaults and expropriations are likely to occur in the same countries. In the short run, however, these events are uncorrelated. Defaults are more likely to occur following periods of rapid debt accumulation, when growth is low, and in countries with weak policy performance, and defaults are not strongly persistent over time. In contrast, expropriations are not systematically related to the level of foreign direct investment, to growth, or to policy performance. Expropriations are however less likely under right-wing governments, and are strongly persistent over time. There is also little evidence that a history of recent defaults is associated with expropriations, and vice versa. The paper discusses the implications of these findings for models that emphasize retaliation as means for sustaining sovereign borrowing and foreign investment in equilibrium, as well as the implications for political risk insurance against the two types of events.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6218.

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Date of creation: 01 Oct 2012
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Handle: RePEc:wbk:wbrwps:6218
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  1. Qian, Rong, 2012. "Why do some countries default more often than others ? the role of institutions," Policy Research Working Paper Series 5993, The World Bank.
  2. Andrew K. Rose, 2002. "One Reason Countries Pay their Debts: Renegotiation and International Trade," NBER Working Papers 8853, National Bureau of Economic Research, Inc.
  3. Sergei Guriev & Konstantin Sonin & Anton Kolotilin, 2007. "Determinants of Expropriation in the Oil Sector: A Theory and Evidence from Panel Data," Working Papers w0115, Center for Economic and Financial Research (CEFIR).
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," CEMA Working Papers 595, China Economics and Management Academy, Central University of Finance and Economics.
  5. Fernando Broner & Alberto Martin & Jaume Ventura, 2006. "Sovereign Risk and Secondary Markets," NBER Working Papers 12783, National Bureau of Economic Research, Inc.
  6. Michael Tomz & Mark L. J. Wright, 2007. "Do countries default in “bad times”?," Working Paper Series 2007-17, Federal Reserve Bank of San Francisco.
  7. Roberto Perotti, 1996. "Redistribution and Non-Consumption Smoothing in an Open Economy," Review of Economic Studies, Oxford University Press, vol. 63(3), pages 411-433.
  8. Cruces, Juan J. & Trebesch, Christoph, 2013. "Sovereign defaults: The price of haircuts," Munich Reprints in Economics 20036, University of Munich, Department of Economics.
  9. Berg, Andrew & Sachs, Jeffrey, 1988. "The debt crisis structural explanations of country performance," Journal of Development Economics, Elsevier, vol. 29(3), pages 271-306, November.
  10. Roberto Chang & Constantino Hevia & Norman Loayza, 2010. "Privatization and Nationalization Cycles," NBER Working Papers 16126, National Bureau of Economic Research, Inc.
  11. Daron Acemoglu & Simon Johnson & James Robinson & Yunyong Thaicharoen, 2002. "Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth," NBER Working Papers 9124, National Bureau of Economic Research, Inc.
  12. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
  13. Michael Tomz & Mark L. J. Wright, 2008. "Sovereign Theft: Theory And Evidence About Sovereign Default And Expropriation," CAMA Working Papers 2008-07, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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