Determinants of Government and External Debt: Evidence from the Young Democracies of South America

Abstract

I investigate the main determinants of government and external debt in the young democracies of South America between 1970 and 2007. The results, based on dynamic panel time-series analysis, suggest that economic growth has significantly reduced the debt ratios in the region. Other candidates suggested by the literature—for example, inflation, inequality, and constraints on the executive—do not present the expected or clear-cut estimates on government and external debt. The results suggest that an economic environment geared toward generating economic activity and prosperity is an important factor in keeping the debt ratios under control in the region.

KEY WORDS:

• democracy
• government and external debt
• South America

Acknowledgments

The author thanks seminar participants at University of Cape Town, Pretoria, Göttingen, Stellenbosch, Heidelberg, and Economics Research Southern Africa (ERSA) Public Economics Workshop in Johannesburg, an ERSA referee, and three referees of this journal for comments. A short version of this article, under the title “Does Growth Matter for Government and External Debt in the Young Democracies of South America? Yes It Does!” appeared on Vox.LACEA in July 2013. The usual caveat applies.

Notes

1. Parallel literature dealing with political budget cycles is also of some interest for the South American case; however, I do not address those issues in this article. For more on this literature, see Brender and Drazen (2005) and Shi and Svensson (2006).

2. Bittencourt (2012) suggests that some of those young South American democracies experienced hyperinflation right after redemocratization in the 1980s and early 1990s.

3. I also run regressions using the Bruno (2005) correction, and with the inflation tax, lagged democracy, fiscal unbalance, lagged growth, lagged urbanization, and inequality and with the principal components of government and external debt on the right-hand side. All estimates are consistent with those reported here. The results are available on request. Furthermore, I report in the Appendix the generalized method of moments (GMM) estimates, which are also consistent with those reported.