Working Paper: NBER ID: w2610
Authors: Alberto Alesina; Guido Tabellini
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.
Keywords: External Debt; Capital Flight; Political Risk
JEL Codes: F34; H63; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political uncertainty (D89) | private capital flight (F21) |
| Political uncertainty (D89) | low domestic investment (H54) |
| Left-wing governments (P39) | capital controls (F38) |
| Government ideology (P16) | policy decisions regarding capital outflows (F32) |
| Political incentives (D72) | overborrowing by governments (H74) |
| Accumulation of external debt (F34) | higher than socially optimal levels (H49) |