Nathan Sussman

Emerging Market Spreads: Then versus Now

This paper analyzes yield spreads on sovereign debt issued by emerging markets using modern data from the 1990s and newly-collected historical data on debt traded in London during 1870–1913, a previous “golden era†for international capital market integration. Applying several empirical approaches, we show that the co-movement of spreads across emerging markets is higher today than it was in the historical sample. We also show that sharp changes in spreads today tend to be mostly related to global events, whereas country-specific events played a bigger role in 1870–1913. Although we find some evidence that economic fundamentals, too, co-move more strongly today than at that time, our interpretation of the results is that today’s investors pay less attention to country-specific events than their predecessors did in 1870–1913.

Institutional Reforms, Financial Development and Sovereign Debt: Britain 1690 1790

ernment debt, and financial development in Britain (1690-1790) and find that interest rates remained high and volatile for four decades after the Glorious Revolution, partly due to wars and instability; British interest rates co-moved with those in Holland; Debt per capita remained lower in Britain than in Holland until around 1780; and Britain did not borrow at lower rates than European countries with more limited protection of property rights. We conclude that, in the short run, institutional reforms are not rewarded by financial markets.

Institutions, Reforms, and Country Risk: Lessons from Japanese Government Debt in the Meiji Era

We evaluate the effect of the establishment of modern state institutions (e.g. a central bank or a constitution) on the risk premium associated with government debt traded abroad. Drawing on evidence from one of the most dramatic reform periods in modern history, and using data on sovereign debt traded in London between 1870 and 1914, we investigate the impact of major reforms on the yields of Japanese government debt following the Meiji Restoration. We show that, although the risk premium on Japanese debt declined during the period, the establishment of modern, western institutions did not elicit an immediate market response. The one institutional reform that significantly reduced the perceived risk associated with Japanese bonds was the adoption of the Gold Standard in 1897. In addition, political events such as the Anglo-Japanese treaty (1902) and the military victory over Russia (1905) improved Japans debt capacity, and led to a substantial increase in the volume of Japanese debt. We conclude that, at least in the short run, well understood monetary rules as well as military achievements matter more for the perception of a country by foreign investors than modern state institutions, although we do not rule out the possibility that in the long run institutions do affect a countrys credit rating.

The International Monetary System in the (Very) Long Run

This paper takes stock of the evolution of the international monetary system over the last thousand years. Several points stand out from the analysis. One is the reluctance of governments to embrace radical changes in international monetary relations. Another is the conflict between external and domestic objectives over the cycle, which has been a source of significant tension in the industrial core through much of this century, is now becoming a significant issue for developing countries. Finally, recent developments represent a return to the more market-driven international monetary system that characterized the better part of the preceeding millennium.

Asymmetric Information and Commodity Money: Tickling the Tolerance in Medieval France

An important development in Europe was the emergence of nationally circulating commodity money. Asymmetric information between coin producers and users provided rulers with an opportunity to supply a public good: standard universally accepted coins. The authors describe the development of a sophisticated monetary system (bureaucracy) in medieval France. In the monitoring, scheme employed by the crown, fines were levied against private mint masters when coins did not meet the standards. Yet, fineness or quality of the coin was measured in a way favorable to the mint master. The show that this method implicitly encouraged the mint masters to produce low quality coins in such a way that the crown earned rents and we measure these rents. Copyright 1997 by Ohio State University Press.

Delays in Technology Adoption, Appropriate Human Capital, Natural Resources and Growth

This paper analyzes the link between natural resources abundance, the quality of learning institutions and retardation in technology adoption. We offer a model in which human capital is technology specific and that learning to master the technology is costly. Market failure in the human capital market causes an underinvestment in human capital that leads to our most important result that small differences in natural resources endowments can bring about delays in technology adoption and persistent income per capita differences. We analyze the dynamics of convergence by follower countries and show it exhibits very fast growth initially and thereafter convergence to the growth rate of leader. We show that differences in the quality of learning institutions may account for persistent differences in the level of income per capita, and may be an important source of leapfrogging. We include endogenous population growth and show that technology adoption is consistent with a demographic transition. Our results are consistent with the historical record and show that resource rich countries were overtaken by poor resource countries - reversal of fortune. Unlike current emphasis on legal systems, constitutions and property rights, we highlight the importance of efficient and high quality school system and openness to foreign technologies and knowledge as factors that shorten the adoption delay. This enables us to account for the rapid growth exhibited by countries that lack common institutional features of the Anglo-Saxon tradition. We suggest a straight forward policy recommendation that calls on governments to allow free flow of knowledge and to invest in good school and training systems.

Constitutions, Commitment, and the Historical Evidence on the Relation between Institutions, Property Rights and Financial Development

This paper challenges the North and Weingast (1989) view that attributes Britains ascendancy to economic supremacy to institutions that provided protection of property rights starting in the late seventeenth century. We show that for much of the eighteenth century, interest rates in Britain remained fairly high, and fluctuated considerably in response to political instability. We also show that the volume of British government debt remained low for nearly a century after the institutional changes described by North and Weingast. Finally, we show that British interest rates moved in tandem with Dutch interest rates, suggesting that Britain did not embark on a different path following the institutional changes of the late seventeenth century. We conclude that, in the short run, institutional reforms do not lead to higher growth by lowering the cost of capital.

Questioning Credible Commitment: Institutions, deficits, and wars: The determinants of British government borrowing costs from the end of the seventeenth century to 1850

We present historical data on sovereign bond spreads drawn from 300 years of data (from the late seventeenth century to the late twentieth century), which appear to be inconsistent with the North and Weingast (1989) view that institutional changes and reforms can reduce the cost of government debt soon after they are implemented. Extended time series data on British government debt from the late seventeenth century until 1850 show that, for over a century after the Glorious Revolution, and even in the nineteenth century, wars and episodes of instability were a significant and robust determinant of the risk premium on British government debt. Furthermore, we show that the effect of wars on the cost of debt is due in part to an increase in ―country risk,‖ not only to war-induced budget deficits. This evidence is inconsistent with the claim made by Barro (1987) according to which the increase in interest rates was due to temporary increases in government spending. Results reproduced from Sussman and Yafeh (2000) suggest that in nineteenth century Japan, as well as in large samples of emerging markets in the period 1870-1913 and in the 1990s (Mauro, Sussman and Yafeh, 2006) wars and political instability were strongly correlated with the cost of debt, whereas institutional changes were not. Our overall reading of the historical evidence is therefore that institutional reforms rarely have a rapid and significant impact on bond spreads which tend to respond, at least in the short run, primarily to crises and instability.