Sovereign Defaults and Expropriations: Empirical Regularities

36 Pages Posted: 20 Apr 2016

See all articles by Maya Eden

Maya Eden

World Bank - Development Research Group (DECRG)

Aart Kraay

World Bank - Development Research Group (DECRG)

Rong Qian

World Bank

Date Written: October 1, 2012

Abstract

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.

Keywords: Debt Markets, Bankruptcy and Resolution of Financial Distress, External Debt, Emerging Markets, Investment and Investment Climate

Suggested Citation

Eden, Maya and Kraay, Aart and Qian, Rong, Sovereign Defaults and Expropriations: Empirical Regularities (October 1, 2012). World Bank Policy Research Working Paper No. 6218. Available at SSRN: https://ssrn.com/abstract=2156798

Maya Eden (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Aart Kraay

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-473-5756 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/akraay

Rong Qian

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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