Review Journal "Voter Sophistication and Domestic Preferences Regarding Debt Default"

Title	Voter Sophistication and Domestic Preferences Regarding Debt Default
Author	Michael Tomz
Year	2004

1.  Introduction

The existing literature on international public debt – and on compliance with international agreements more generally – says little about voters and other domestic groups. Default is assumed to trigger costs, such as reduced access to capital markets, the disruption of international trade, and/or diplomatic and military sanctions. Default is also thought to bring benefits, especially the savings from not transferring interest and principal to creditors. After comparing costs and benefits, the leader decides whether repayment serves the interests of the country as a whole. Sections 4-6 discuss the data and findings, drawn from three surveys of Argentine voters during the years 1984-2002, and section 7 concludes the paper by suggesting several avenues for future research.

2. Hypotheses about the Formation of Policy Preferences

Leaders can achieve this objective during good times by contracting new loans and using the proceeds to service old obligations, a process called debt rollover. When economic conditions turn sour, however, the supply of external finance often dries up and rollover ceases. In summary, debt repayment requires budget cuts that reduce the absolute and relative income of public sector employees, the unemployed and the poor. This leads to the first set of hypotheses: other factors equal, government employees and the unemployed/poor should be less inclined to repay the foreign debt than citizens who are personally less vulnerable to fiscal austerity.

3. Statistical Model

Building on the previous section, I propose a statistical model to estimate how the preferences of voters vary, depending on their exposure to the costs and benefits of default, as well as their degree of economic sophistication. In this equation, the cutpoints or thresholds (τ’s) break latent variable into intervals, each corresponding to an observed response.

4. Data

The principal data for this study come from a specially designed survey of 442 eligible Argentine voters in July 2002. Only six months earlier, the Argentine government had suspended service on nearly $100 billion in foreign bonds, triggering the largest default in international financial history.

5. Conclusion

systematic analysis of citizen preferences about foreign debt. It has documented the diversity of opinions in the electorate and explained them with two clusters of variables: the distributional effects of default, and the level of citizen sophistication. The evidence, based on a unique collection of Argentine surveys, reveals a clear pattern. Support for repayment is lowest among citizens who stand to lose from the fiscal adjustment that would accompany repayment, but highest among those who value future access to foreign