Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-10T19:02:51.666Z Has data issue: false hasContentIssue false
  • English
  • Français

The effects of bond ratings on income inequality in the developing world

Published online by Cambridge University Press:  31 March 2020

Glen Biglaiser Open the ORCID record for Glen Biglaiser [Opens in a new window]  and
Ronald McGauvran
Get access Rights & Permissions [Opens in a new window]

Abstract

Although the effects of globalization on income inequality has received much attention, missing from the discussion is the role played by credit rating agencies (CRAs) on income inequality. Using a sample of seventy developing countries from 1990–2015, we find that bond ratings have significant, yet indirect, effects on income inequality. We see that interest rate spreads, and to a lesser degree tax, labor, and monetary policies, mediate the relationship between ratings and income inequality. Specifically, developing countries receiving bond downgrades observe a rise in interest rate spreads. Countries with higher interest rate spreads tend to have less available credit, which reduces output and production, promoting surplus labor and its consequences for those at the bottom of the income distribution. Bond downgrades also compel developing countries to pursue neoliberal reforms, endorsed by the CRAs, in an attempt to lift their ratings. The effects of tax, labor, and monetary policies, in particular, appear to enlarge disparities between the rich and the poor. Our research helps to identify the mechanism by which CRAs and globalization, more generally, impact wealth disparities in the developing world.

Keywords

Income inequalitycredit rating agenciesglobalizationsovereign bond ratings
Type
Research Article
Information
Business and Politics , Volume 23 , Issue 1 , March 2021 , pp. 36 - 66
Copyright
Copyright © V.K. Aggarwal and Cambridge University Press 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aghion, Philippe, and Bolton, Patrick. 1997. “A Theory of Trickle-Down Growth and Development.” The Review of Economic Studies 64 (2): 151–72.CrossRefGoogle Scholar
Allison, Paul D. 2009. Fixed Effects Regression Models (Vol. 160). Thousand Oaks, CA: SAGE publications.CrossRefGoogle Scholar
Archer, Candace, Biglaiser, Glen, and DeRouen, Karl. 2007. “Sovereign Bond Ratings and Democracy: The Effects of Regime Type in the Developing World.” International Organization 61 (1): 341–65.CrossRefGoogle Scholar
Arellano, Manuel, and Bond, Stephen. 1991. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” Review of Economic Studies 58 (2): 277–97.CrossRefGoogle Scholar
Avelino, George, Brown, David S., and Hunter, Wendy. 2005. “The Effects of Capital Mobility, Trade Openness, and Democracy on Social Spending in Latin America, 1980–1999.” American Journal of Political Science 49 (July): 625–41.CrossRefGoogle Scholar
Baek, In-Mee, Bandopadhyaya, Arindam, and Du, Chan. 2005. “Determinants of Market-Assessed Sovereign Risk: Economic Fundamentals or Market Risk Appetite?” Journal of International Money and Finance 24(4): 533–48.CrossRefGoogle Scholar
Banerjee, Abhijit V., and Newman, Andrew F.. 1993. “Occupational Choice and the Process of Development.” Journal of Political Economy 101 (2): 274–98.CrossRefGoogle Scholar
Bank for International Settlements. 2017. Basel III. “Finalising Post-Crisis Reforms.” Basel: Bank for International Settlements.Google Scholar
Barbosa-Filho, Nelson H. 2008. “An Unusual Economic Arrangement: The Brazilian Economy during the First Lula Administration, 2003–2006.” International Journal of Politics, Culture, and Society 19 (1): 193–218.CrossRefGoogle Scholar
Barbour-Lacey, Edward. 2014. “Positive Economic Numbers for Vietnam in 2013: Strong Outlook for 2014.” Vietnam Briefing. Available at: https://www.vietnam-briefing.com/news/positive-economic-numbers-vietnam-2013-strong-outlook-2014.html/.Google Scholar
Baron, Reuben M., and Kenny, David A.. 1986. The Moderator–Mediator Variable Distinction in Social Psychological Research: Conceptual, Strategic, and Statistical Considerations. Journal of Personality and Social Psychology 51 (6): 1173–82.CrossRefGoogle ScholarPubMed
Beaulieu, Emily, Cox, Gary W., and Saiegh, Sebastian M.. 2012. “Sovereign Debt and Democracy: Re-considering the Democratic Advantage.” International Organization 66: 709–38.CrossRefGoogle Scholar
Beck, Thorsten, Clarke, George, Groff, Alberto, Keefer, Philip, and Walsh, Patrick. 2001. “New Tools in Comparative Political Economy: The Database of Political Institutions.” World Bank Economic Review 15 (1): 165–76.CrossRefGoogle Scholar
Beinen, Henry, and Waterbury, John. 1989. “The Political Economy of Privatization in Developing Countries.” World Development 17: 617–32.CrossRefGoogle Scholar
Belser, Patrick, and Rama, Martin. 2001. “State Ownership and Labor Redundancy: Estimates Based on Enterprise-Level Data from Vietnam.” Policy Research Working Paper 2599. Development Research Group, World Bank, Washington, DC.Google Scholar
Biglaiser, Glen, and DeRouen, Karl. 2007. “Sovereign Bond Ratings and Neoliberalism in Latin America.” International Studies Quarterly 51 (1): 121–38.CrossRefGoogle Scholar
Biglaiser, Glen, and Staats, Joseph L.. 2012. “Finding the ‘Democratic Advantage’ in Sovereign Bond Ratings: The Importance of Strong Courts and the Rule of Law.” International Organization 66 (3): 515–35.CrossRefGoogle Scholar
Block, Steven A., and Vaaler, Paul M.. 2004. “The Price of Democracy: Sovereign Risk Ratings, Bond Spreads and Political Business Cycles in Developing Countries.” Journal of Money Finance 23 (6): 917–46.CrossRefGoogle Scholar
Bollen, Kenneth A. 1989. Structural Equations with Latent Variables. New York: John Wiley & Sons, Inc.CrossRefGoogle Scholar
Borensztein, Eduardo, and Panizza, Ugo. 2009. “The Costs of Sovereign Default.” IMF Staff Papers 56 (4): 683–741.CrossRefGoogle Scholar
Breen, Michael, and McMenamin, Iain. 2013. “Political Institutions, Credible Commitment, and Sovereign Debt in Advanced Economies.” International Studies Quarterly 57: 842–54.CrossRefGoogle Scholar
Bulow, Jeremy I., and S, Kenneth. Rogoff. 1988. “Sovereign debt: Is to forgive to forget?” National Bureau of Economic Research Working Paper No. 2623. https://www.nber.org/papers/w2623.pdf.CrossRefGoogle Scholar
Calderón, Cesar, and Chong, Alberto. 2001. “External Sector and Income Inequality in Interdependent Economies Using a Dynamic Panel Data Approach.” Economics Letters 71 (2): 225–31.CrossRefGoogle Scholar
Campello, Daniela. 2014. “The Politics of Financial Booms and Crises: Evidence from Latin America.” Comparative Political Studies 47 (2): 260–86.CrossRefGoogle Scholar
Campello, Daniela 2015. The Politics of Market Discipline in Latin America: Globalization and Democracy. New York: Cambridge University Press.CrossRefGoogle Scholar
Cantor, Richard, and Packer, Frank. 1996. “Determinants and Impact of Sovereign Credit Ratings.” Economic Policy Review 2 (2): 37–54.Google Scholar
Carroll, Christopher. D. 2000. “Requiem for the Representative Consumer? Aggregate Implications of Microeconomic Consumption Behavior.” American Economic Review 90 (2): 110–15.CrossRefGoogle Scholar
Castro-Leal, Florencia, Dayton, Julia, Demery, Lionel, and Mehra, Kalpana. 1999. “Public Social Spending in Africa: Do the Poor Benefit?” The World Bank Research Observer 14 (1): 49–72.CrossRefGoogle Scholar
Cheibub, Jose. A., Gandhi, Jennifer, and Vreeland, James R.. 2010. “Democracy and Dictatorship Revisited.” Public Choice 143 (2): 67–101.CrossRefGoogle Scholar
Christopher, Rachel, Kim, Suk-Joong, and Wu, Eliza. 2012. “Do Sovereign Credit Ratings Influence Regional Stock and Bond Market Interdependencies in Emerging Countries?” Journal of International Financial Markets, Institutions and Money 22 (4): 1070–89.CrossRefGoogle Scholar
Chu, Ke-Young, Davoodi, Hamid Reza, and Gupta, Sanjeev. 2000. Income Distribution and Tax and Government Social Spending Policies in Developing Countries. (No. 0-62). Washington, DC: International Monetary Fund.Google Scholar
Clay, K. Chad, and DiGiuseppe, Matthew. 2017. “The Physical Consequences of Fiscal Flexibility: Sovereign Credit and Physical Integrity Rights.” British Journal of Political Science 47 (4): 783–807.CrossRefGoogle Scholar
Cragg, John G., and Donald, Stephen G.. 1993. “Testing Identifiability and Specification in Instrumental Variable Models.” Econometric Theory 9 (2): 222–40.CrossRefGoogle Scholar
Creighton, Adam, Gower, Luke, and Richards, Anthony J.. 2007. “The Impact of Rating Changes in Australian Financial Markets.” Pacific-Basin Finance Journal 15 (1): 1–17.CrossRefGoogle Scholar
Dabla-Norris, Era, Kochhar, Kalpana, Suphaphiphat, Nujin, Ricka, Frantisek, and Tsounta, Evridiki. 2015. Causes and Consequences of Income Inequality: A Global Perspective. Washington, DC: International Monetary Fund.Google Scholar
DiGiuseppe, Matthew, and Shea, Patrick E.. 2015. “Sovereign Credit and the Fate of Leaders: Reassessing the ‘Democratic Advantage’.” International Studies Quarterly 59 (3): 557–70.CrossRefGoogle Scholar
DiGiuseppe, Matthew, and Shea, Patrick E.. 2016. “Borrowed Time: Sovereign Finance, Regime Type and Leader Survival.” Economics and Politics 28 (2): 342–67.CrossRefGoogle Scholar
Fawaz, Fadi, Rahnamamoghadam, Masha, and Valcarcel, Victor. 2012. “Fluctuations, Uncertainty and Income Inequality in Developing Countries.” Eastern Economic Journal 38 (4): 495–511.CrossRefGoogle Scholar
Finkel, Steven. E. 1995. Causal Analysis with Panel Data (No. 105). Thousand Oaks, CA: SAGE Publications.CrossRefGoogle Scholar
Federal Reserve Economic Data. 2018. “3-Month London Interbank Offered Rate (LIBOR), based on U.S. Dollar.” Economic Research: The Federal Reserve Bank of St. Louis. https://fred.stlouisfed.org/categories/33003.Google Scholar
Garrett, Geoffrey. 1998a. “Global Markets and National Politics: Collision Course or Virtuous Circle?” International Organization 52: 787–824.Google Scholar
Garrett, Geoffrey. 1998b. Partisan Politics in the Global Economy. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Gray, Julia. 2013. The Company States Keep: International Economic Organizations and Investor Perceptions. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Ha, Eunyoung. 2008. “Globalization, Veto Players, and Welfare Spending.” Comparative Political Studies 41 (6): 783–813.Google Scholar
Ha, Eunyoung. 2012. “Globalization, Government Ideology, and Income Inequality in Developing Countries.” The Journal of Politics 74 (2): 541–57.CrossRefGoogle Scholar
Hadenius, Axel, and Teorell, Jan. 2005. “Cultural and Economic Prerequisites of Democracy: Reassessing Recent Evidence.” Studies in Comparative International Development 39 (4): 87–106.CrossRefGoogle Scholar
Hanusch, Marek, and Vaaler, Paul M.. 2013. “Credit Rating Agencies and Elections in Emerging Democracies: Guardians of Fiscal Discipline?” Economics Letters 119 (3): 251–54.CrossRefGoogle Scholar
Heise, David. R. 1970. “Causal Inference from Panel Data.” Sociological Methodology 2: 3–27.CrossRefGoogle Scholar
Heritage Foundation. Several Years. “Index of Market Freedom.” Available at: http://www.heritage.org/index/.Google Scholar
Huber, Evelyne, Nielsen, Francois, Pribble, Jenny, and Stephens, John D.. 2006. “Politics and Inequality in Latin America and the Caribbean.” American Sociological Review 71 (6): 943–63.CrossRefGoogle Scholar
Huber, Evelyne, and Stephens, John D.. 2012. Democracy and the Left: Social Policy and Inequality in Latin America. Chicago, IL: University of Chicago Press.CrossRefGoogle Scholar
Imai, Kosuke, Keele, Luke, and Yamamoto, Teppei. 2010. “Identification, Inference and Sensitivity Analysis for Causal Mediation Effects.” Statistical Science 25 (1): 51–71.CrossRefGoogle Scholar
IMF. 2016. “IMF Lending.” October 3rd. Washington, DC: International Monetary Fund. http://www.imf.org/en/About/Factsheets/IMF-Lending.Google Scholar
Jewell, Jeff, and Livingston, Miles. 1999. “A Comparison of Bond Ratings from Moody's S&P and Fitch.” Financial Markets, Institutions, and Instruments 8 (4): 1–45.CrossRefGoogle Scholar
Kahn, Charles, Pennacchi, George, and Sopranzetti, Ben. 1999. “Bank Deposit Rate Clustering: Theory and Empirical Evidence.” The Journal of Finance 54 (6): 2185–214.CrossRefGoogle Scholar
Kaminsky, Graciela, and Schmukler, Sergio. 2001. “Emerging Market Instability: Do Sovereign Ratings Affect Country Risk and Stock Returns?” World Bank Economic Review 16: 171–95.Google Scholar
Katzenstein, Peter J. 1985. Small States in World Markets. Ithaca, NY: Cornell University Press.Google Scholar
Kaufman, Robert, and Segura-Ubiergo, Alex. 2001. “Globalization, Domestic Politics and Social Spending in Latin America: A Time-Series Cross-Section Analysis, 1973–1997.” World Politics 53 (4): 553–87.CrossRefGoogle Scholar
Kittel, Bernhard, and Winner, Hannes. 2005. “How Reliable is Pooled Analysis in Political Economy? The Globalization-Welfare State Nexus Revisited.” European Journal of Political Research 44 (2): 269–93.Google Scholar
Kremer, Michael, and Mehta, Paras. 2000. Globalization and international public finance. National Bureau of Economic Research Working Paper No. 7575. National Bureau of Economic Research. https://www.nber.org/papers/w7575.pdf.Google Scholar
Kumhof, Michael, Rancière, Romain, and Winant, Pablo. 2015. “Inequality, Leverage, and Crises.” American Economic Review 105 (3): 1217–45.CrossRefGoogle Scholar
Lang, Valentin F. 2016. “The Democratic Deficit and its Consequences: The Causal Effect of IMF Programs on Inequality.” Unpublished paper presented at the 2015 Political Economy of International Organizations conference. https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=CSAE2016&paper_id=973.Google Scholar
Larrian, Guillermo, Reisen, Helmut, and Von Maltzen, Julia. 1997. “Emerging Market Risk and Sovereign Credit Ratings.” OECD Development Centre Technical Papers No. 124. Organization for Economic Cooperation and Development, Paris, France.Google Scholar
Lee, Cheol-Sung. 2005. “Income Inequality, Democracy, and Public Sector Size.” American Sociological Review 70 (February): 158–81.CrossRefGoogle Scholar
Lee, Cheol-Sung, Nielsen, Francois, and Alderson, Arthur S.. 2007. “Income Inequality, Global Economy and the State.” Social Forces 86 (1): 77–111.CrossRefGoogle Scholar
Little, Todd D., Card, Noel A., Bovaird, James A., Preacher, Kristopher J., and Crandall, Christian S.. 2007. “Structural Equation Modeling of Mediation and Moderation with Contextual Factors.” Modeling Contextual Effects in Longitudinal Studies 1: 207–30.Google Scholar
Mandi, Angela Moraa. 2014. “An Assessment of Kenya's Sovereign Risk.” PhD dissertation. School of Economics, University of Nairobi.Google Scholar
Marshall, Monty G., and Jaggers, Keith. 2006. Polity IV Project: Political Regime Characteristics and Transitions, 1800–2004. College Park, MD: University of Maryland. Available at: <http://www.cidcm.umd.edu/inscr/polity/>.Google Scholar
Milanovic, Branko. 2014. Description of All the Ginis Dataset. New York: Luxembourg Income Study.Google Scholar
Moody's. 1998. “Moody's Downgrades Malaysia's Ratings.” 23 July. New York: Moody's Investor Services.Google Scholar
Moody's. 2002. “Moody's Downgrades Brazil.” 12 August. New York: Moody's Investor Services.Google Scholar
Moody's. 2004. “Moody's Upgrades Brazil's Ratings as Exports Expand and Foreign Currency Borrowing is Reduced.” 9 September. New York: Moody's Investor Services.Google Scholar
Moody's. 2015. “Rating Methodology: Sovereign Bond Ratings.” 18 December. New York: Moody's Investor Services.Google Scholar
Mosley, Layna. 2003. Global Capital and National Governments. New York: Cambridge University Press.Google Scholar
Muller, Edward N. 1988. “Democracy, Economic Development, and Income Inequality.” American Sociological Review 53 (1): 50–68.CrossRefGoogle Scholar
Muñoz, Guillermo Maya, and Soto, Daniel Restrepo. 2016. “Boom and Bust in Colombia 1990–2013.” In Latin America after the Financial Crisis, edited by Santarcángelo, J.E., Justo, O., and Cooney, P.: 87–115. New York: Palgrave Macmillan.Google Scholar
Nafziger, E. Wayne. 1997. The Economics of Developing Countries, 3rd edition. Upper Saddle River, NJ: Prentice Hall.Google Scholar
Nizalova, Olena Y., and Murtazashvili, Irina. 2016. “Exogenous Treatment and Endogenous Factors: Vanishing of Omitted Variable Bias on the Interaction Term.” Journal of Econometric Methods 5 (1): 71–77.CrossRefGoogle Scholar
Ostry, Jonathan D., Berg, Andrew, and Tsangarides, Charalambos G.. 2014. Redistribution, Inequality, and Growth. Washington, DC: International Monetary Fund.Google Scholar
Pieper, Ute, and Taylor, Lance. 1998. “The Revival of the Liberal Creed: The IMF, the World Bank, and Inequality in a Globalized Economy.” Globalization and Progressive Economic Policy 1 (4): 37–63.CrossRefGoogle Scholar
Piketty, Thomas. 1997. “The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing.” The Review of Economic Studies 64 (2): 173–89.CrossRefGoogle Scholar
Preacher, Kristopher J., Zhang, Zhen, and Zyphur, Michael J.. 2011. “Alternative Methods for Assessing Mediation in Multilevel Data: The Advantages of Multilevel SEM.” Structural Equation Modeling 18 (2): 161–82.CrossRefGoogle Scholar
Rancière, Romain, Throckmorton, Nathaniel A., Kumhof, Michael, Lebarz, Claire, and Richter, Alexander W.. 2012. Income Inequality and Current Account Imbalances (No. 12–18). Washington, DC: International Monetary Fund.Google Scholar
Reuveny, Rafael, and Li, Quan. 2003. “Economic Openness, Democracy, and Income Inequality: An Empirical Analysis.” Comparative Political Studies 36 (5): 575–601.CrossRefGoogle Scholar
Rodrik, Dani. 1997. Has Globalization Gone Too Far? Washington, DC: Institute for International Economics.CrossRefGoogle Scholar
Rodrik, Dani. 1998. “Why Do More Open Economies Have Bigger Governments?” Journal of Political Economy 106 (5): 997–1032.CrossRefGoogle Scholar
Rudra, Nita. 2002. “Globalization and the Decline of the Welfare State in Less-Developed Countries.” International Organization 56 (2): 411–45.CrossRefGoogle Scholar
Rudra, Nita. 2008. Globalization and the Race to the Bottom in Developing Countries: Who Really Gets Hurt? Cambridge: Cambridge University Press.CrossRefGoogle Scholar
S&P. 2004. “Sovereign Credit Ratings:” A Primer. 15 March. Available at: https://web.stanford.edu/~johntayl/PoliciesInternationalFinance/documents/ch3/S&P-Sovereign%20Credit%20Ratings%20Primer.pdfGoogle Scholar
Schwarcz, Steven I. 2001. “The Role of Credit Agencies in Global Market Regulation.” Eds. Ferran, Eilis and Goodhart, A.E.. Regulating Financial Services and Markets in the 21st Century. Portland, OR: Hart Publishing.Google Scholar
Sen, Amartya. 1973. On Economic Inequality. Oxford: Oxford University Press.CrossRefGoogle Scholar
Sinclair, Timothy J. 2005. The New Masters of Capital: American Bond Rating Agencies and the Politics of Creditworthiness. Ithaca, NY: Cornell University Press.Google Scholar
Solt, Frederick. 2015. “On the Assessment and Use of Cross-National Income Inequality Datasets.” Available at: http://myweb.uiowa.edu/fsolt/papers/Solt2015b_pre.pdf.Google Scholar
Stock, James, and Yogo, Motohiro. 2005. “Asymptotic Distributions of Instrumental Variables Statistics with Many Instruments.” Identification and Inference for Econometric Models: Essays in Honor of Thomas Rothenberg: 109–120.CrossRefGoogle Scholar
Sy, Amadou N. R. 2002. “Emerging Market Bond Spreads and Sovereign Credit Ratings: Reconciling Market Views with Economic Fundamentals.” Emerging Markets Review 3: 380–408.CrossRefGoogle Scholar
Tanzi, Vito, and Zee, Howell H.. 2000. “Tax Policy for Emerging Markets: Developing Countries.” IMF Working Paper WP/00/35.CrossRefGoogle Scholar
UNU-WIDER. 2018. “Social Assistance, Politics, and Institutions (SAPI) Database [Online].” Helsinki: United Nations University World Institute for Development Economics Research (UNU-WIDER). Available from: https://www.wider.unu.edu/project/sapi-social-assistance-politics-and-institutions-database.Google Scholar
Vaaler, Paul M., Schrage, Burkhard N., and Block, Steven A.. 2005. “Counting the Investor Vote: Political Business Cycle Effects on Sovereign Bond Spreads in Developing Countries.” Journal of International Business Studies 36 (1): 62–88.CrossRefGoogle Scholar
Vaaler, Paul M., Schrage, Burkhard N., and Block, Steven A.. 2006. “Elections, Opportunism, Partisanship and Sovereign Ratings in Developing Countries.” Review of Development Economics 10 (1): 154–70.CrossRefGoogle Scholar
VanderWeele, Tyler J. 2016. “Mediation Analysis: A Practitioner's Guide.” Annual Review of Public Health 37: 17–32.CrossRefGoogle ScholarPubMed
Végh, Carlos A., and Vuletin, Guillermo. 2015. “How is Tax Policy Conducted over the Business Cycle?” American Economic Journal: Economic Policy 7: 327–70.Google Scholar
White, Lawrence J. 2010. “Markets: The Credit Rating Agencies.” The Journal of Economic Perspectives 24 (2): 211–26.Google Scholar
Wibbels, Erik. 2006. “Dependency Revisited: International Markets, Business Cycles, and Social Spending in the Developing World.” International Organization 60 (Spring): 433–68.CrossRefGoogle Scholar
Wright, Jonathan H. 2003. “Detecting Lack of Identification in GMM.” Econometric Theory 19 (2): 322–30.Google Scholar
World Bank. 2015. World Development Indicators. Washington, DC: World Bank.Google Scholar
Supplementary material: File

Biglaiser and McGauvran Supplementary Materials

Biglaiser and McGauvran Supplementary Materials

Download Biglaiser and McGauvran Supplementary Materials(File)
File 111.1 KB