We investigate in this paper what are the main determinants of government and external debt in South America. Our sample purposely includes all nine South American countries that re-democratised in the last thirty years or so, and the data cover the period 1970-2007. The results, based on principal component and dynamic panel (time-series) data analyses (we use the Pooled OLS, Fixed Effects, Fixed Effects with Instrumental Variables, DIF-GMM and SYS-GMM estimators), suggest that economic growth has had the ability of significantly reduce debt in the region. Other important candidates suggested by the literature, such as inflation, in-equality and constraints on the executive (variables that some would deem important within the rather turbulent South American context), do not present the expected nor clear-cut estimates on government and external debt. Essentially, the results suggest firstly that the (neoclassical) tax-smoothing model holds in South America, or that the continent is, after all, countercyclical, and secondly they highlight the importance of such case studies in order to avoid unwarranted generalisations about the continent's recent history. All in all, in times of a renewed spell of populism in the region and of a severe debt crisis in Europe, these conclusions are suggestive of the importance of an economic environment geared towards generating economic activity and prosperity in, at least, keeping debt under control.
Determinants of Government and External Debt: Evidence from the Young Democracies of South America
Working paper 341
Emerging Markets Finance and Trade
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