City Research Online

Abstract

Research shows that violent and organized crime reduces foreign direct investment and that armed conflict lowers sovereign credit ratings. Building on these insights, I argue violent crime reduces financial institutions’ confidence in the capacity of governments to repay loans, raising the costs attached to loans and reducing government debt through a “supply-side” logic. Yet, the supply-side logic is difficult to test. Governments can render lenders indifferent to violent crime by accepting higher borrowing costs, resulting in no observed relationship between them. It is for this reason that analysis of the effect of violent crime on credit ratings alone cannot tell us much about its effect on government debt. In this study, I explain how analysis of subnational debt from welfare-minded public banks and profit-minded private lenders can distinguish the supply-side logic from the null hypothesis. Cross-sectional time-series analysis of homicide rates and municipal debt in Mexico demonstrates support for the supply-side logic. Evidence of the supply-side logic reveals that those governments most in need of cost-efficient financing are most likely to be charged higher prices for it or priced out of capital markets altogether, signaling the need for market intervention in these cases.

Publication Type:	Article
Additional Information:	This is a post-peer-review, pre-copyedit version of an article published in Studies in Comparative International Developmen. The final authenticated version is available online at: http://dx.doi.org/10.1007/s12116-017-9256-8.
Publisher Keywords:	criminal violence, armed conflict, sovereign debt, subnational debt, subnational capital markets, international capital markets, Mexico
Subjects:	F History United States, Canada, Latin America > F1201 Latin America (General) H Social Sciences > HG Finance H Social Sciences > HV Social pathology. Social and public welfare
Departments:	School of Policy & Global Affairs > International Politics
SWORD Depositor:	Symplectic Administrator

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