Democracy, Autocracy, and Sovereign Debt: How Polity Influenced Country Risk on the Peripheries of the Global Economy, 1870-1913

Abstract

This article tests the influential democratic advantage hypothesis – that democratic governments have historically borrowed more cheaply than autocratic governments – in the context of the first financial globalization, from circa 1870 to 1913. We construct indicators of political regime types, then regress government bond spreads of 27 independent capital-importing countries on them. In contrast with the mainstream literature, the results suggest that democracies were associated with higher country risk. Our findings indicate that autocratic regimes had a significant advantage: democracies paid 5.7 percent more on their debt than autocracies, controlling for several financial and political variables. This gap is the equivalent of 35.4 percent of the negative effect defaults had on credit costs. Our conclusions hold when allowing for different definitions of political regime type and bond spreads. The correlations identified also find support in qualitative evidence, according to which creditors favored autocracies for being politically more stable than democracies