External Debt, Capital Flight and Political Risk

45 Pages Posted: 23 Apr 2004 Last revised: 22 Aug 2010

See all articles by Alberto F. Alesina

Alberto F. Alesina

Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Guido Tabellini

Bocconi University - Department of Economics; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

Date Written: June 1988

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.

Suggested Citation

Alesina, Alberto F. and Tabellini, Guido, External Debt, Capital Flight and Political Risk (June 1988). NBER Working Paper No. w2610. Available at SSRN: https://ssrn.com/abstract=310460

Alberto F. Alesina (Contact Author)

Harvard University - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Guido Tabellini

Bocconi University - Department of Economics ( email )

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Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

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Italy

Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

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Germany

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