The Political Economy of Debt

Willem Buiter on the lessons of Dubai in the Financial Times.

From Dubai to Iceland, Ireland, Greece, Hungary, Italy, Portugal, Spain, Japan, France, the UK and the USA, the sovereign debt burdens have been at current levels during peacetime only on the way down from even higher public debt burdens incurred during wars … The political economy of fiscal burden sharing, inside nations and between nations, will be a major field of enquiry for economists and political scientists during the years to come. I am pessimistic in that regard about countries characterised by deep polarisation and political gridlock. This includes nations as different as Greece and the USA.

It is clear that nations whose public debt is mainly denominated in domestic currency and whose central bank is either not very independent or can be make dependent by the government of the day are likely to choose inflation and exchange rate depreciation over default as a way out of fiscal-financial unsustainability. That category would include the USA and, to a lesser extent, the UK. Because the ECB faces 16 national governments and national ministries of finance, the power and independence of the ECB are much greater vis-a-vis any Euro Area member state than the power and independence of any central bank facing a single national government and Treasury. That is regardless of the formal independence criteria laid down in laws, treaties or constitutions.

Pretty interesting – but as far as I am aware, there is very little political science work indeed on the politics of debt to date. The area is wide open for grad students looking for dissertation topics …

2 Responses to The Political Economy of Debt

  1. James Conran November 30, 2009 at 7:45 pm #

    I suppose it could be seen as more about delegation and veto players than the politics of public debt per se, but some of David Stasavage’s work would fit the bill, particularly his critique of Douglass North and Barry Weinast’s article on the emergence of the Bank of England.

    http://www2.lse.ac.uk/researchAndExpertise/Experts/d.stasavage@lse.ac.uk

  2. Dave G December 3, 2009 at 1:19 pm #

    Ecuador was a fascinating case of default earlier this year, with a president rising to power on a platform, essentially, of intentional default. Felix Salmon covered it well:
    http://blogs.reuters.com/felix-salmon/2009/05/29/lessons-from-ecuadors-bond-default/

    And I’m unsure how much this analysis integrates domestic political calculus, but Vinod Aggarwal’s Debt Games looked at variation in debt renegotiation in Latin America through the game theory lens:
    http://www.amazon.com/Debt-Games-Interaction-International-Rescheduling/dp/0521555523