Article: Is foreign private national debt challenging governance in emerging markets? Journal: International Journal of Economics and Accounting (IJEA) 2013 Vol.4 No.1 pp.54 - 92 Abstract: We study why foreign private national debt is higher in some countries than others by examining its effect on the governance environment in emerging markets. We also questioned whether countries which have ratified bilateral investment treaties have higher debt as a source of external financing than others. Examining the debt capacity of 46 countries from 1993 to 2004, we found that declines in their private debt to international reserve ratios correlate positively with increases in the number of foreign investors-government disputes mediated before international tribunals. As these markets experience financial crises, we calculated a 74% probability that disputes over the property rights of foreign investors are likely to continue. This study uses institutional change theory (North, 1990) where it overlaps with agency and game theory to examine a moral hazard which arises when the government plays the role of a double principal to a contract signed by a foreign investor-agent and governed by its electorate-agent. Gaming behaviour ensues because the government responds to the agent where it can achieve the maximum benefit. The results suggest that governments should strengthen their institutions governing the rule of law prior to contracting with foreign investors. Inderscience Publishers - linking academia, business and industry through research

Title: Is foreign private national debt challenging governance in emerging markets?

Authors: Shirley A. Hunter; Charles A. Malgwi

Addresses: Office of the Chief Financial Officer, Foreign Policy Section-Special Projects, United States Agency for International Development (USAID), 1300 Pennsylvania Avenue N.W., Washington, D.C. 20523, USA. ' Department of Accountancy, Bentley University, 175 Forest Street, Waltham, MA 02452, USA

Abstract: We study why foreign private national debt is higher in some countries than others by examining its effect on the governance environment in emerging markets. We also questioned whether countries which have ratified bilateral investment treaties have higher debt as a source of external financing than others. Examining the debt capacity of 46 countries from 1993 to 2004, we found that declines in their private debt to international reserve ratios correlate positively with increases in the number of foreign investors-government disputes mediated before international tribunals. As these markets experience financial crises, we calculated a 74% probability that disputes over the property rights of foreign investors are likely to continue. This study uses institutional change theory (North, 1990) where it overlaps with agency and game theory to examine a moral hazard which arises when the government plays the role of a double principal to a contract signed by a foreign investor-agent and governed by its electorate-agent. Gaming behaviour ensues because the government responds to the agent where it can achieve the maximum benefit. The results suggest that governments should strengthen their institutions governing the rule of law prior to contracting with foreign investors.

Keywords: foreign debt; governance; emerging markets; economics; accounting; private debt; national debt; bilateral investment treaties; external financing; international reserves; property rights; foreign investment; institutional change theory; game theory; moral hazard.

DOI: 10.1504/IJEA.2013.050593

International Journal of Economics and Accounting, 2013 Vol.4 No.1, pp.54 - 92

Published online: 29 Apr 2014 *

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Title: Is foreign private national debt challenging governance in emerging markets?

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