Raise the Debt

Abstract

Abstract Governments frequently borrow money. It is often assumed that it is creditors, and creditors alone, who determine what loans developing countries obtain. Yet this is only partially true: the data show that countries with the same credit rating, income levels, and degree of democracy exhibit a remarkable diversity in the types of creditors used. Some borrow from China, while others turn to the United States; some borrow from private investors, while others rely on multilateral institutions. Apparently, developing countries have some choice. Developing countries are not merely passive recipients gobbling up whatever loans they can get, but active agents. This book systematically explains how governments choose among competing loan offers. The argument focuses on societal interest groups in recipient countries and the distributional consequences of external loans. For example, China and the International Monetary Fund might both offer the same loan volume, but the strings attached to the loans differ. As a result, domestic interest groups would benefit from one loan but not the other. Governments then cater to whichever domestic interest group coalition dominates by borrowing from that coalition’s preferred creditor. Interviews with decision-makers in Ecuador, Peru, and Colombia provide strong evidence that domestic politics shape borrowing decisions. A Statistical analyses confirms that borrowing portfolios around the world reflect the relative strength of societal interest groups. Understanding why certain loans are chosen is critical for gaining insights into the effects these loans might have on growth and democracy.