Advertisement

Open Economies Review

, Volume 16, Issue 1, pp 77–99 | Cite as

Crony Capitalism and Sovereign Default

  • Victor Vaugirard
Article

Abstract

Cronyism provides policymakers with marked incentives to repay sovereign debt. This takes place at the expense of the average citizen who bears both steep costs of debt repudiation and high costs of debt service, as clientelism increases both financial fragility and the debt burden. The paper sets up a model of strategic debt default that nails down this point, with political distortions and where a representative agent can dismiss the government and overrule its decision. Economic hard times provide an opportunity to implement reforms fighting clientelism, as the implicit coalition between groups of cronies may break down. A model is built along these lines, which highlights cross-country contagion of debt repudiation.

Keywords

crony capitalism political distortion debt service financial fragility pure contagion 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Calvo, Guillermo A. (1988) “Servicing the Public Debt: The Role of Expectations.“ American Economic Review 78:647–661.Google Scholar
  2. Chang, Roberto (2003) “Financial Crises and Political Crises.“ Working Paper, Rutgers University, NJ.Google Scholar
  3. Cole, Harold L. and Timothy J. Kehoe (1996) “A Self-Fulfilling Model of Mexico’s 1994–1995 Debt Crisis.“ Journal of International Economics 41:309–330.Google Scholar
  4. Di Gioacchino, Debora, Sergio Ginebri, and Laura Sabani (2000) “Bribery and Public Debt Repudiation.“ Public Choice 105:303–321.Google Scholar
  5. Drazen, Allan (1999) “What is Gained by Selectively Withholding Foreign Aid?“ Working Paper, University of Maryland.Google Scholar
  6. Drazen, Allan (2000) “Political Contagion in Currency Crises.“ In P. Krugman (ed.), Currency Crises. Chicago: University of Chicago Press. Also, NBER Working Paper # 7211 (1998).Google Scholar
  7. Drazen, Allan and Vittorio Grilli (1993) “The Benefits of Crises for Economic Reforms.“ American Economic Review 83:598–607.Google Scholar
  8. Fisman, Raymond (2001) “Estimating the Value of Political Connections.“ American Economic Review 91:1095–1102.Google Scholar
  9. Giannetti, Mariassunta (2003) “Bank-Firms Relationships and Contagious Banking Crises.“ Journal of Money, Credit and Banking 35:239–261.Google Scholar
  10. Goldstein, Morris (1998) “The Asian Financial Crises: Causes, Cures and Systemic Implications.“ Policy Analyses in International Economics 55. Washington, D.C.: Institute for International Economics.Google Scholar
  11. Gunter, Frank R. (1991) “Thomas Jefferson on the Repudiation of Public Debt.“ Constitutional Political Economy 2:283–301.Google Scholar
  12. Haber, Stephen (2002) Crony Capitalism and Economic Growth in Latin America: Theory and Evidence. Stanford University, Hoover Institution Press Publication.Google Scholar
  13. Haber, Stephen, Noel Maurer, and Armando Razo (2002) “Sustaining Economic Performance under Political Instability: Political Integration in Revolutionary Mexico.“ In Stephen Haber (ed.), Crony Capitalism and Economic Growth in Latin America: Theory and Evidence. Stanford University, Hoover Institution Press Publication.Google Scholar
  14. Haslag, Joseph and Rowena Pecchenino (2004) “Crony Capitalism and Financial System Fragility.“ Economic Inquiry, forthcoming.Google Scholar
  15. Keefer, Philip (2001) “When do Special Interests Run Rampant? Disentangling the Role of Elections, Incomplete Information and Checks and Balances in Banking Crises.“ World Bank Working Paper # 2543, Washington D.C.Google Scholar
  16. Kodres, Laura E. and Matthew Pritsker (2002) “A Rational Expectations Model of Financial Contagion.“ The Journal of Finance 57:769–799.Google Scholar
  17. Kremer, Michael and Seema Jayachandran (2002) “Odious Debt.“ Policy Brief #103, The Brookings Institution, Harvard University.Google Scholar
  18. Kumar, Manmohan S. and Avinash Persaud (2002) “Pure Contagion and Investors’ Shifting Risk Appetite: Analytical Issues and Empirical Evidence.“ International Finance 5:401–436.Google Scholar
  19. Navia, Patricio and Andrés Velasco (2002) “The Politics of Second Generation Reforms in Latin America.“ Working paper, Kennedy School of Government, Harvard University.Google Scholar
  20. Obstfeld, Maurice (1994) “The Logic of Currency Crises.“ Cahiers Economiques et Monétaires, Banque de France 43:189–213.Google Scholar
  21. Prakash, Aseem (2001) “The East Asian Crisis and the Globalization Discourse.“ Review of International Political Economy 8:119–146.Google Scholar
  22. Robinson, James A. and Thierry Verdier (2002) “The Political Economy of Clientelism.“ CEPRDiscussion paper # 3205.Google Scholar
  23. Tabellini, Guido (1991) “The Politics of Intergenerational Redistribution.“ Journal of Political Economy 99:335–357.Google Scholar
  24. Tornell, Aaron (2002) “Economic Crises and Reform in Mexico.“ In Stephen Haber (ed.), Crony Capitalism and Economic Growth in Latin America: Theory and Evidence. Stanford University, Hoover Institution Press Publication.Google Scholar
  25. Vaugirard, Victor E. (2004) “Informational Contagion of Sudden Stops in a Global Games Framework.“ Open Economies Review 15:169–192.Google Scholar
  26. Velasco Andrés (1999) “A Model of Endogenous Fiscal Deficits, and Delayed Fiscal Reforms.“ In J. Poterba and J. von. Hagen (eds.), Fiscal Institutions and Fiscal Performance. Chicago: University of Chicago Press for the NBER.Google Scholar
  27. Wei, Shang-Jin (2001) “Domestic Crony Capitalism and International Fickle Capital: Is There a Connection?“ International Finance 4:15–45.Google Scholar

Copyright information

© Springer Science + Business Media, Inc. 2005

Authors and Affiliations

  1. 1.TEAM-CNRS & CREFIBUniversity of Paris-1ParisFrance

Personalised recommendations