Young democracies and government debt: evidence from South America

Abstract

I test the hypothesis that when democracies are young, or still fragile and unconsolidated, government debt tends to increase, presumably because of increased demand for redistribution, or to buy out the electorate, so that democracy becomes acceptable and “the only game in town”. I use a sample of all South American young democracies during the 1970–2007 period and the results, based on dynamic panel time-series analysis, suggest that those young democracies are indeed associated with larger government debt. Furthermore, I test the hypothesis that the outgoing dictatorships of the day bequeathed the young democracies with large government debt. This hypothesis is not confirmed by the analysis. Lastly, there is no evidence that, as those democracies mature over time, government debt tends to decrease. Given how I conduct the exercise, that is, the nature of the sample, the methodology I use and the counterfactuals I run, and also that there are always new episodes of democratisation being experienced by different countries around the world, with some being economically successful and others less so, the results I report are informative of what to expect in terms of government debt during political transitions into democracy when particular institutions are still not in place.