Clientelism, Institutions and Sovereign Default

Emerging economies exhibit pro-cyclical fiscal policy, counter-cyclical sovereign spreads, and recurrent debt crises, whereas advanced economies sustain high debt with low spreads and lower volatility in outcomes. We document that these differences are systematically related to institutional strength, measured by horizontal accountability, and to the prevalence of clientelistic allocation of public resources in a panel of 51 countries (1994-2023). We develop a dynamic political-economy model of sovereign borrowing with long-term debt in which institutional constraints discipline clientelistic transfers and shape default incentives. Variation in institutional strength generates both emerging-market and developed-economy outcomes within a unified framework and accounts for heterogeneous post-democratization trajectories in emerging markets.