å F ALL 2014 PAY BACK: EXAMINING THE EFFECT OF POLITICAL INSTABILITY ON THE PROBABILITY OF SOVEREIGN DEFAULT Mary Janes Ajodah BRAZIL'S INTERNET DEVELOPMENT PLANS POST- J 2013 GLOBAL SURVEILLANCE DISCLOSURES OURNAL Natasha Babazadeh REFORM, INEQUALITY, AND PROTEST IN THE CHILEAN EDUCATION SYSTEM OF Elizabeth Maguire P OLITICS THE CUBAN PROPAGANDA MACHINE Michael Maisel & THE INFORMAL ECONOMY IN LATIN AMERICA: I THE CASE OF CHILE AND MEXICO NTERNATIONAL Leticia Pfeffer PRODUCING SOLDIERS FOR THE NEXT WAR: ETHNICALLY DIVIDED EDUCATION IN POST- DAYTON BOSNIA AND HERZEGOVINA Thomas Schoenfelder A CHINA'S 2007 PROPERTY LAW AND THE RULE OF FFAIRS LAW Danae Wheeler V OLUME Journal of Politics & International Affairs XV New York University FALL 2014 VOLUME XV FALL 2014 VOLUME XV PAY BACK: EXAMINING THE EFFECT OF POLITICAL INSTABILITY ON THE PROBABILITY OF SOVEREIGN DEFAULT MARY JANE AJODAH 8 BRAZIL'S INTERNET DEVELOPMENT PLANS POST-2013 GLOBAL SURVEILLANCE DISCLOSURES NATASHA BABAZADEH 35 REFORM, INEQUALITY, AND PROTEST IN THE CHILEAN EDUCATION SYSTEM ELIZABETH MAGUIRE 65 THE CUBAN PROPAGANDA MACHINE MICHAEL MAISEL 78 THE INFORMAL ECONOMY IN LATIN AMERICA: THE CASE OF CHILE AND MEXICO LETICIA PFEFFER 87 PRODUCING SOLDIERS FOR THE NEXT WAR: ETHNICALLY DIVIDED EDUCATION IN POST-DAYTON BOSNIA AND HERZEGOVINA THOMAS SCHOENFELDER 114 CHINA'S 2007 PROPERTY LAW AND THE RULE OF LAW DANAE WHEELER 146 NOTES ON CONTRIBUTORS 154 This publication is published by New York University students. NYU is not responsible for its contents. FALL 2014 VOLUME XV EDITORS-IN-CHIEF Alex Hasapidis The Journal of Politics and International Affairs at Ian Manley NYU is a student-run publication that provides a forum Anjana Sreedhar for outstanding student work on relevant, thought- provoking topics in the domestic and international political CHIEF OF PRODUCTION landscape, including political science, economics, history, Alex Hasapidis published by the Journal have been legitimate and valued COVER PHOTO contributions the intellectual growth of students at New Manpreet Kaur York University and of students nationwide. Trudy Wurm TREASURERS Nika Arzoumanian The Journal of Politics & International Affairs will consider Trudy Wurm proposed or completed unpublished articles of any length that concern domestic politics, international affairs, or EDITORS derivative subjects for publication. Proposals should be Kenzi Abou-Sabe submitted via e-mail at [email protected]. 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Instead, we hope that these pieces are able to inform and inspire the New York University community by addressing a wide variety of topics and opinions from a similarly broad range of ideologies and methods. Manuscripts submitted to the Journal of Politics & International Affairs are handled by three editors-in-chief and six editors located at New York University. Papers are submitted via e-mail and selected over several rounds of readings by the entire staff. Final selections are made by the editors-in-chief. Papers are edited for clarity, readability, and grammar in multiple rounds, during which at least two editors review each piece. Papers are a variety of other considerations such as equalization of the workload and the nature of the work. 8 MARY JANE AJODAH MARY JANE AJODAH FALL 2014 PAY BACK 9 Introduction “No purchaser of a sovereign debt instrument today does so in the hope and expectation that when the debt matures the borrower will have the money to repay it. The purchaser does so in the hope and expectation that when the instrument matures the borrower will be able to borrow the money from somebody else in order to repay it. This is a crucial distinction. If by sovereign creditworthiness we mean that a sovereign is expected to be able to generate enough revenue from taxes or other sources to repay its debts as they fall due, then most countries are utterly insolvent.” -Lee Buchheit, CGSH (Salmon). public interest in sovereign debt sustainability and potential for default. Though sovereign debt crises have traditionally been associated with emerging market economies (Das, Papaioannou, Trebesch 6), developed nations have recently realized their own vulnerabilities. In March 2012, Greece became the ($266 billion) deal proved to be the largest in history, highlighting the dangers of high debt-to-GDP ratios and unsustainable borrowing (Forelle). Temple of Delos in 4 BC (Kennedy, Simon, and Petrakis). While the fundamental purposes of borrowing and consequences of default remain the same throughout the centuries, recent trends in borrowing urge decisions. Question Proposed This paper adopts a distinction made by prior research between a nation’s ability to pay and its willingness to do so. The primary aim of this study is to examine two aspects of political risk that may impact the probability of sovereign default: recent leader change and the process of democratization.This paper will examine whether democracies or autocracies are more likely to default on their external debts, and if the likelihood of default increases when a new leader comes to power. I then look at the process of the following: H1: Non-democratic countries are more likely to default on their external debts than democracies. H2: Leadership change in autocracies will increase the probability of default, while leadership change in democracies will not affect the probability of sovereign default. H3: The probability of sovereign default increases when a nation transitions from a non-democratic ruling regime to a democratic regime. JOURNAL OF POLITICS & INTERNATIONAL AFFAIRS 10 MARY JANE AJODAH Together, these hypotheses aim to provide an empirical test for theories of the drivers of default, using recently released datasets to expand on prior studies of instability. Theoretical Arguments Literature Review Past studies examining the linkage between political risk and sovereign default are generally rooted in the theoretical model of international borrowing equilibrium proposed by Eaton and Gersovitz in 1981. They posit that external debt is a consumption-smoothing tool for borrowers in periods of low income, to be repaid in periods of high income. The model assumes defaulters are permanently locked out from capital markets, and lenders have complete information regarding borrower characteristics and preferences. “One particular attribute of all borrowers is that they are inherently dishonest in that they a purely technical event driven by inability to pay, but exists as an outcome of a broader utility function. Tomz (2007) more succinctly captures the argument, writing: “[Governments] can cut public spending, increase taxes on citizens, sell state-owned assets, and commandeer foreign exchange from private exporters. [In the case of default]…this almost never implies that the government is penniless. Rather, it signals a lack of political will to elevate the foreign debt over the factors that drive default as a choice and attempting to account for the realistic moral hazard issues of debtor punishment. This study builds upon prior research examining the domestic characteristics of a nation that may lead to higher likelihood of choosing default. Two strands of literature, one examining instability as predictors of default will be studied in tandem to provide grounding for the hypotheses of H1: Non-democratic countries are more likely to default on their external debts than democracies. The primary thrust of the theoretical literature agrees with this assertion, but empirical tests conducted to date have presented contradictory conclusions depending on the sample selected. This study aims to use the broadest historical sample size available to evaluate this hypothesis, deriving relevant controls from the theoretical arguments. The “democratic advantage” in raising sovereign debt and mechanisms for credible commitment present in democracies (but not autocracies) form the main theoretical basis for H1. Schultz and Weingast (2003), building upon the seminal work of North and Weingast (1989), examine games of protracted international competition, of which external debt repayment serves as an example. They contend that two key features of democracies drive repayment: legislative assemblies that control FALL 2014 PAY BACK 11 Liberal governments maintain a “democratic advantage” in obtaining international credit over their illiberal counterparts because creditors have stronger faith that these institutional features will lead to repayment. Since autocrats are less beholden to their domestic citizenry and have more concentrated control over national spending than representative democracies, the