Rewards to Improving Governance in Rich and Poor Countries: Evidence from Sovereign Credit Ratings

We measure the effect of governance on sovereign creditworthiness, as measured by sovereign credit ratings. Governance may affect the government's ability to raise tax revenue to service its debt, with poor enough governance leading to insolvency. Data for 1996-2005 indicate that countries with better governance have higher probabilities of getting top ratings and that improving governance increases the likelihood of a top rating more for lower income countries than for higher income countries. Governance thus plays a role in reducing the likelihood of default, thereby facilitating countries' access to international credit markets and their financial sector development.