Social Polarization, Social Institutions, and Country Creditworthiness

Abstract

The literature argues that the presence
 of multiple veto players (government decisionmakers) with
 polarized interests increases the credibility of sovereign
 commitments, but reduces the ability of governments to
 adjust policies in the event of exogenous shocks that
 jeopardize their ability to honor their commitments. In the
 case of sovereign lending, if the first effect prevails,
 countries would be regarded as more creditworthy; if the
 second, less. The authors address two issues. First, using
 measures of country creditworthiness, they ask whether the
 net effect of multiple veto players is positive or negative.
 Second, though, the authors go beyond the existing
 literature to argue that the net effect of multiple veto
 players depends on the nature of social polarization in a
 country. In particular, they argue that political
 competition is fundamentally different in countries
 exhibiting ethnic polarization than in countries polarized
 according to income or wealth. The evidence supports the
 prediction that multiple veto players matter more when
 countries are more ethnically polarized, but less when
 income inequality is greater.