Debt and Coalitions: Domestic Politics and Sovereign Borrowing

Abstract

The most important transformation in the international economy over the last two decades has been the rise of the BRIC economies - those of Brazil, Russia, India and China. These countries have experienced massive economic growth, and play an increasingly critical role in global trade in goods. More recently, BRICs - especially China - have taken on yet another critical role as sources of loans to developing countries. While loans from wealthy democracies to developing countries declined from $216 billion in the 1990s to $128 billion in the 2000s, loans from BRIC governments increased from $9 billion to $85 billion. Cash- strapped governments often find loans from BRIC lenders attractive because they come with fewer "strings" attached. Yet what is puzzling is that despite the apparent benefits of such loans, only a third of all developing countries have jumped at the opportunity to abandon the United States and the IMF by borrowing from China instead. That is, most governments have not taken advantage of loan offers by BRICs, but continue to faithfully borrow from traditional creditors. Given the apparent availability of "easy money," why do some developing countries choose BRIC loans over IMF loans while others do not? My dissertation is the first to systematically explore the response by developing countries to loan offers by BRICs. I argue that the key determinant of loan choice is the relative power of Labor interests versus those of Finance and Industry. Because the loans offered by the World Bank and IMF have systematically different conditions than loan offers from BRICs, they create different relative winners and losers among Industry, Finance and Labor. Loans from traditional lenders tend to come with stringent conditions that favor fiscal prudence and price stability, largely benefiting Finance and Industry, whereas BRIC loans fund projects with few conditions of state spending, benefiting Labor through employment generation. By analyzing which coalition dominates politically, I can explain why some governments turn to BRICs while others turn to the IMF or private foreign creditors. I support my argument with both qualitative and quantitative evidence. Interviews with decision makers in Ecuador, Peru and Colombia provide empirical support on a micro level. I triangulate the insights from the field with a statistical analysis of loan data to test whether my argument holds for a larger set of cases. The normative implications of my findings pertain to three issues: power, economic development and democracy. With respect to the first issue, loans to foreign countries are thought to provide creditor countries with a degree of power over recipient countries. Previously, this process was understood to be determined by creditors alone, such as the US and the USSR during the Cold War. However, my dissertation points to the power of recipient countries to affect the outcome of this confrontation. Thus, my work illuminates how globalization actually increases small states' room to maneuver in an increasingly globalized world. Second, the debate regarding economic development is currently dominated by two paradigms. On the one hand, there is the (neo-)liberal model promoted by western actors. Here, citizens are enabled to be productive members in markets governed by comparative advantages by improving the skills and abilities of individuals. On the other hand, the industrialization paradigm draws inspiration from the East Asian Tigers (e.g. South Korea and Taiwan). It therefore focuses on creating new comparative advantages by actively promoting industrialization. My dissertation spells out which countries follow which development path, and therefore provides insights into the prospects of lifting millions out of poverty. Third, there is democracy. Many have argued that Chinese loans might undermine democracy in recipient countries as the loans lack `good governance' conditions. I provide a different view. My dissertation is a major step towards understanding the distributional consequences of different loans. If IMF loans benefit the capital owners who are already rich, but Labor - the numerically largest actor - benefits from BRIC loans, emerging creditors might contribute to a reduction in inequality, which has been shown to make democracy more likely.