Institutions, Partisanship and Credibility in Global Financial Markets by Hye Jee Cho

Author:Hye Jee Cho [Cho, Hye Jee]
Language: eng
Format: epub
Tags: Public Policy, Political Science, Globalization, Economic Policy
ISBN: 9781315445038
Google: XJcuDwAAQBAJ
Goodreads: 35864229
Publisher: Routledge
Published: 2017-07-28T00:00:00+00:00

Conclusions

This chapter has examined the relationship between democratic institutions and sovereign credit ratings. There is no consensus about the effects of democracy on economic performance, as theories and empirical findings point in different directions. In relation to sovereign credibility, the democratic advantage argument states that democracies build sovereign credibility among investors because the accountability mechanism induces democratic governments to be more responsible in dealing with their debt obligations.

Democracies have positive qualities that appeal significantly to investors. A democratic system has greater accountability and representativeness that increase policy predictability. Democracies better address corruption because they are more transparent than autocracies in their policymaking. Corruption tends to be more prevalent in less transparent situations and where the administrative apparatus has excessive power. Transparent political processes, and institutional structures that oversee political leaders and hold them accountable for their decisions, are likely to reduce the opportunities for corruption. Democracy’s open deliberation process also appeals to investors because public discussion of important economic and political issues allows international investors to recognize the important issues a country faces to see how the public responds to them. This aids in predicting directions in policymaking. Open discussion also allows people in a society to reconcile their different interests in a peaceful way, helping countries in economic trouble to avoid the escalation of social conflict. The checks and balances usual in democracies are also important, particularly for discouraging populism.

The findings of this chapter suggest that democratic systems have positive credibility-building effects on the credit ratings of leftist governments, but not for non-leftist governments. Greater transparency in policy-related information further helps the credit ratings of left-wing governments, but no such relationship is found for others. Moreover, negative institutional changes also have a significant association with left-wing governments’ credit ratings. One may interpret these empirical findings as showing that democratic virtues – such as reducing corruption, providing for the rule of law, constraining arbitrary executive power, discouraging populism, and respecting public deliberative processes – are particularly effective when a leftist party is in power. A leftist government’s move away from democratic principles is perceived as risky for fear that it is leading toward populist economic policies. Populist leaders typically ignore the rule of law, relying on their mandate directly from the people. If a country lacks effective institutions to constrain the whims of its political leader, that leader may try to exercise power autocratically. Historically, many leftist governments have reversed their pledges to pursue free-market policies and privatization and instead have infringed private property. Investors may greatly appreciate democratic rules that provide greater transparency in the policymaking process and lead to fewer arbitrary policy changes made by political leaders.

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