Partisan External Borrowing in Middle-Income Countries

Ben Cormier

doi:10.1017/s0007123421000697

Abstract

AbstractWhy do middle-income country governments use costlier sovereign debt markets when cheaper finance is available from official creditors? This research note argues that left-leaning governments with labor and the poor as core constituencies are likely to prioritize markets in their annual foreign borrowings. This is because markets provide an exit option from official creditor conditions that have disproportionately negative effects on working classes. This finding puts limits on disciplinary assumptions that left-leaning governments should have relatively less access to sovereign debt markets and thus use them less. Instead, left-leaning middle-income countries are likely to use proportionally more market finance as they fulfill annual foreign borrowing needs. This, in turn, shapes which middle-income countries are likely to become relatively more exposed to global debt market costs and pressures as they accumulate external debt over time.

Highlights

Why do some Middle Income Country (MIC) governments use costlier sovereign debt markets when cheaper finance is available from official creditors? This study argues that, for left-leaning MIC governments with labor and the poor as core constituents and interventionist economic policy preferences, sovereign debt markets provide an exit option from official lenders that offer cheaper-but-conditional credit
This study theorizes that this in turn means leftleaning MIC governments resist conditionalities in the name of policy autonomy that allows the service of working-class constituencies such as labor and the poor, using sovereign debt markets as an exit option from official creditors when fulfilling annual borrowing needs
By extension, borrowing preferences vary across regimes because borrowings must still match the regime’s constituents’ preferences as they seek to survive politically. This leads to the following hypothesis: H1: All else equal, left-leaning MIC governments with labor and the poor as core constituencies use a greater proportion of market-based finance to meet annual foreign borrowing needs

Summary

Introduction

Why do some Middle Income Country (MIC) governments use costlier sovereign debt markets when cheaper finance is available from official creditors? This study argues that, for left-leaning MIC governments with labor and the poor as core constituents and interventionist economic policy preferences, sovereign debt markets provide an exit option from official lenders that offer cheaper-but-conditional credit (all else equal). This note shows that left-leaning MICs are likely to use more market finance proportional to annual foreign borrowing needs.

Results

Conclusion