Research Project

The “Democratic Advantage” hypothesis suggests that within international borrowing and lending markets, democratic nations benefit from cheaper borrowing costs compared to non-democratic nations. In theory, democracies can make more credible and time-consistent commitments to repay their debts, meaning that even in “bad” states of the world where debt default is preferred to debt repayment, democracies will continue to honor their commitment to repay. The empirical and theoretical literature on this topic is highly mixed, with some literature finding democratic disadvantages, meaning that financial markets perceive democracies to be less credible with regards to their commitment to repay. By constructing a panel data set across 32 countries and spanning 5 years, this paper contributes to the discussion in two ways. First, we focus our observation towards emerging market and developing economies between the years of 2018-2022. Much of the existing literature studies periods prior to 2008. We believe that macroeconomic developments during the post-financial crisis era and during the pandemic may have altered the way that democratic emerging markets in particular are perceived by creditors. Second, we focus on conditional democratic advantages. Much of the existing literature does not explicitly draw a distinction between whether democratic advantages observed during “good” economic periods will persist during “bad” economic periods, and vice versa. We will define a distinction between “good” and “bad” economic periods, and attempt to determine whether the observed outcomes are distinct in each period. Accordingly, we hope to reconcile the mixed results democratic (dis)advantages found in existing literature.