Borrowing Countries Research Articles

Profit or Power: Determinants of Chinese Financing to the Developing World

ABSTRACT Since the launch of its ‘going out’ strategy in 1999, China has become the largest bilateral sovereign lender to the developing world. This article argues that, since Xi Jinping came to power in 2012, China has used overseas financing to developing countries to consolidate a strategical wedge between certain borrowing countries and the United States, China’s main geopolitical rival. Using a Heckman two-stage estimation, this article shows how China, albeit providing financing to a wide array of developing nations, lends more and on more favourable terms to countries that are farther away from the United States in terms of foreign policy preferences. Statistical analyses on a sample of 148 developing countries from 2000 to 2017 provide support for the hypotheses.

The Relationship between Sovereign Debt and Politics

ABSTRACT: With the rise of bonded private debt over the past 15 years, there is an increased dependency on private creditors for sovereign nations that borrow to finance their government activities. The power of private creditors gained through increased sovereign debt burdens is affecting the internal political dynamics of these borrower countries, especially in the Global South, including Latin America. A larger external debt burden creates internal political conflict around the distribution of benefits, so debt is intimately linked with politics. Standard economics literature ignores this problem by hypothesizing markets based on perfect competition. We outline a set of hypotheses regarding the relationship between creditors' political preferences in sovereign debt markets that feature "power rents," when relatively powerful foreign investors can obtain significantly higher returns by lending to smaller, weaker nations. Bringing power asymmetries into the debt discussion, we also present a research agenda for economics and political science.

China Lending and the Political Economy of Leader Survival

What are the political implications of Chinese loans to borrowing countries? Our argument is that similar to other forms of international finance, loans from China provide leaders with additional resources to maintain their power. The nature of China’s lending practices—characterized by an absence of good governance conditions—offers a unique advantage to political leaders, allowing corrupt leaders who receive loans from China to stay in power for longer periods. To support this argument, we conducted an analysis of a dataset of 115 developing countries from 2000 to 2015, focusing on the relationship between Chinese loans and leaders' political survival. Our findings indicate that Chinese loans positively impact leader survival, with the strongest effects observed in more corrupt regimes. To address endogeneity concerns, we employ a shift-share instrumentation strategy and several additional tests. Our analysis underscores the importance of Chinese lending to both international and domestic politics.

Lending corruption and bank loan contracting: Cross-Country evidence

Using World Bank survey data, we document that banks extend more favorable loan terms to borrowers in countries with more lending corruption. This relation is stronger when borrowers have financing constraints but weaker in countries with stronger monitoring of foreign bank ownership or with stronger religiosity. We also find that banks in countries with high lending corruption have poor loan quality and earnings performance and are more susceptible to trouble during a financial crisis. Overall, our findings suggest that corruption “greases the wheels” for borrowers but is detrimental to bank shareholders.

The cyclicality of official bilateral lending: Which cycle do flows follow?

Using a large panel of official bilateral loan data for 111 borrowing countries and 73 lending countries between 1985 and 2020, the paper shows that international government borrowing from bilateral sources is acyclical with respect to the business cycle of the borrower but procyclical with respect to the cycle of the lending country. This result holds in the case of loans from advanced economies and China, currently the largest supplier of official bilateral lending to the average developing country. We find this form of procyclicality most notable during contractions in origin countries and most often among middle-income recipient countries across most world regions. We also find that bilateral loans follow economic links captured through bilateral trade. The results are consistent across a battery of robustness tests.

The IMF’s Credit Policy — Assistance to the Needy or a Tool of Enslavement?

The paper discusses examples of lending by the International Monetary Fund in three countries with different degrees of economic development. The subject of the paper is not the loan itself, but the fact that in order to receive it, the IMF puts forward a number of conditions designed to ensure the stability of the economy, but in fact repeatedly criticized for the opposite, negative result. The impact of the IMF loan on the economy, therefore, becomes very ambiguous and requires a closer analysis. Macroeconomic analysis allows us to determine the specific effects of the crisis and IMF reforms on the economy, while the world-system analysis based on these data reveals the position of certain countries in the international division of labor. The aim of the work was to identify the impact of loans provided by the International Monetary Fund on the economies of countries. Based on the results of the analysis, it became possible to determine the role of the International Monetary Fund in the international economy and identify diffi culties in achieving its global goals. Thus, the IMF’s activities only allow preserving the existing world order without leading to rapid growth of the economies of the borrowing countries. In this regard, taking into account all current global trends, the authors believe that attention should be paid to the development of other international institutions that will allow in the medium and long term to fulfill the goals laid down in the charter of the International Monetary Fund.

Drivers of cross‐border bank claims: The role of foreign‐owned banks in emerging countries

AbstractStudies of the determinants of cross‐border bank claims are based on the economic situations of the lending and borrowing countries—the traditional push/pull factors—but fail to take into account the situation of the international lending banks and the presence of their subsidiaries in emerging countries. They also fail to explain the huge decrease in cross‐border bank flows after the 2008 global financial crisis. In this paper, we analyse the determinants of cross‐border bank claims on a panel of 28 emerging countries and explicitly integrate banking determinants. Thus, we account for the financial situation of international lender banks and the existence of foreign locations in emerging countries as a potential pull stabilising factor. We show that the presence of foreign banks in emerging countries is clearly a factor of attraction for cross‐border bank claims. It remains when we explicitly take into account the 2008 crisis but to a lower extent and in favour of interbank loans. This may be proof of support from the international parent banks to their affiliates. Last, the financial situation of international banks, notably their liquidity and ability to respect prudential rules, also plays a role in their financing strategies in emerging countries.

Are gross financial inflows expansionary or contractionary? Evidence from emerging economies

This paper put to the test two hypotheses. First, do gross financial inflows lead to an expansionary or contractionary effect in emerging economies? Second, do different financial inflows exhibit diverse impacts on domestic output and if there is any aggregation bias? However, our work ameliorates the existing literature by tackling the problem of slope heterogeneity and cross-correlated errors by adopting dynamic common-correlated predictors. The analysis further identify different regimes in the regression relationships, considering our sample includes significant global financial imbalances, global financial crisis, taper tantrum period, etc. We find that all types of gross financial inflows, except gross debt inflows, are expansionary. However, there is evidence of possible aggregation bias in using aggregated gross financial flows. Our findings imply that a distinction between different types of financial inflows is necessary to make informed policy recommendations since policies based on aggregate inflows may be ill-advised. Further, emerging markets should focus on encouraging direct and portfolio equity inflows and improving local financial markets’ absorptive capacities in borrower countries to improve welfare gains.

International Borrowing and Lending in the Presence of Oligopolistic Competition

This paper examines the implications of imperfect competition in a two-country framework where a single good is produced. Using an overlapping generation model, we analyze the effects of market structures. Specifically, one country is assumed to operate under a perfectly competitive market structure, while the other country operates under an oligopolistic market structure. Our analysis reveals that the differences in factor prices between the two countries when they are in autarky lead to intergenerational trade once their capital markets are integrated. A key finding is that the country with an oligopolistic market structure becomes a lending country, while the country with a competitive market structure becomes a borrowing country. Furthermore, we find that the country with an oligopolistic market structure, serving as a lender, experiences a current account surplus, while the country with a perfectly competitive market structure, acting as a debtor, incurs a current account deficit.

INTERNATIONAL MONETARY FUND (IMF) AND ISLAMIC FINANCE

International Monetary fund is widely known for its financial support and stability programs toward week and unstable economies around the world. It was not until 21st century when Islamic modes of financing became an official part of IMF’s finance market after successfully generating record breaking revenues in Muslim countries like Malaysia and Saudi Arabia. The most important aspect of Islamic finance was Sukuk. In fact, it was the reason Islamic finance became a part of IMF. But the current working of IMF around the world and Islamic mode of financing don’t go side by side. The reason for this is interest based policies of IMF and increased risk factor for borrower countries. Moreover, IMF exploits week economies using funds obtained by strong countries and as a result, poor becomes poorer and rich becomes richer. It is the IMF who took out the values of the most important financial entities from Muslim countries; Oil and Gold. It can be said that as a result of IMF and its success, Muslim countries suffered the most and are still suffering. Pakistan is the living example of this suffering. The amount of debt payable by Pakistan is insane and send shivers down the spine. So it can be concluded that IMF started for a noble cause to support economies suffering from great depression and WWII but it has become a Mafia who cares only about gaining more power and hold over poor economies.

Using COVID-19 as opportunity: the role of the AIIB’s leadership in its strategic adaptation to the pandemic

The COVID-19 pandemic led to a steep rise in demand for COVID-recovery lending and a decrease in capacity for infrastructure borrowing in many countries struggling to cope with its economic effects. This has presented a significant challenge to the Asian Infrastructure Investment Bank (AIIB), as its project pipelines had been developed mainly for traditional infrastructure lending. This paper examines the strategies employed by the AIIB to adapt to the COVID-19 pandemic. The findings showcase how its institutional leadership effectively employed its authority, resources, and leadership competences to push for an adaptive response strategy. This was achieved by pitching a response based on the expansion of the AIIB’s operational scope beyond traditional heavy infrastructure lending and the introduction of new policy instruments for funding COVID-recovery projects. The AIIB also engaged in collaborative partnerships with other MDBs to access their project pipelines and expertise. Thanks to these efforts, the AIIB not only managed to cope with the challenge, but its leadership also ensured the institution would come out of the pandemic having opportunistically benefited from it. The findings speak to the scholarship on IO resilience and bureaucratic politics. The analysis relies on official documents and original data from 20 interviews with IO officials and experts.

PROPOSED BOARD OF PUBLIC DEBT BURDEN ASSESSMENT

The financial situation of any country is highlighted by the level of its deficit. It is difficult to imagine a state that is not involved in the problem of having a deficit budget. There are various sources of financing the deficit of the state budget, but the most applicable is the involvement of foreign loans, which ultimately increases the burden of the state debt. Effective management of public debt is important in the context of financial management. In the article, the authors used the external debt/export ratio tool to evaluate the RA state debt, one of the debt evaluation coefficients used by the World Bank for the classification of borrower countries. The results of the reanalysis based on the mentioned methodology allows us to note that, in general, the debt ratio of RA was in the "acceptable" range specified by the World Bank in the considered periods, except for the "horrific" range recorded in 2009, 2016 and 2021, the causal interpretation of which was presented in the article.

Bureaucratic Representation in the IMF and the World Bank

The legitimacy and effectiveness of international organizations are often linked directly to issues of representation—not only on their high-level governing boards and in top leadership but also within their staff. This article explores two key questions of bureaucratic representation in the critical cases of the International Monetary Fund and World Bank. First, we seek to unpack three essential dimensions of staff representation—nationality, education, and gender—to explain how representation may matter for international organizations. Second, we aim to describe the multiple dimensions of representation in the International Monetary Fund and the World Bank over the past twenty years by deploying a novel dataset on staff demographics, focusing on ranks with decision-making authority within the institutions. Our descriptive analysis reveals that the International Monetary Fund and the World Bank have made considerable efforts to diversify their bureaucracies. Nonetheless, representation remains uneven; for example, nationals from middle- and low-income countries, women, and staff without economics degrees from prominent US- or UK-based universities are less present in key leadership positions. These results may be well explained by the particular needs of the institutions’ technical mandates and limits in the supply of qualified staff and, as such, need not be seen as suboptimal. Nonetheless, perceived imbalances in representation may continue to pose external legitimation and operational challenges to the International Monetary Fund and the World Bank in a complex political environment where such multidimensional representation is important to sustaining the buy-in of donor and borrower countries alike. To this end, we recommend that the International Monetary Fund and the World Bank enhance their diversity and inclusion efforts by increasing transparency via reporting disaggregated data on workforce composition and introducing annual requirements to publish progress reports with management feedback to strengthen internal and external accountability.

Sovereign bail‐outs and fiscal rules in a banking union*

AbstractIn this paper, we study optimal fiscal rules in a two‐country economy in which cross‐country linkages between sovereign debts and banking sectors motivate bail‐outs among countries. The first‐best sovereign borrowing, which is contingent on the output gap between the countries, cannot be achieved in the presence of asymmetric information on a country's potential output. Because bail‐out induces overborrowing, fiscal rules can be implemented to prevent the ensuing inefficiency. A mechanism can be designed to induce a country with low potential output (i.e., a small negative output gap) to run an optimal budget deficit upon receiving a transfer (ex post) from the other country. We characterize conditions under which this fiscal mechanism Pareto dominates a “cyclically adjusted” fiscal rule imposing a unique ceiling on a country's borrowing, independently of its potential output. We apply our setting to a discussion of the implications for fiscal rules within the European Monetary Union.

IMF's Surcharges as a Threat to the Right to Development.

This article focuses on the implications of the IMF’s surcharges policies, jointly with its de facto preferred creditor status, on the right to sustainable development of sovereign borrowers. The article argues that, while surcharges are not effective in limiting access to IMF credit, they inequitably distribute the IMF’s operating costs, are disproportionate, pro-cyclical, very costly for developing countries, and non-transparent. Furthermore, if surcharges are theoretically a way to protect the IMF from potential risks of default, the article questions the IMF’s de facto preferred creditor status, as it precisely denies the possibility of granting debt relief in case of insolvency, ultimately affecting the right to development of —mainly— middle-income borrowing countries.

The Influence of Alternative Development Finance on the World Bank’s Safeguards Regime

Abstract What shapes social-environmental regulations in the World Bank? To date, scholars have emphasized the influence of nongovernmental organization activism, donor power, and various elements of the Bank’s internal culture and incentive system. This article documents a new and important source of influence: outside financing options for borrower countries. I demonstrate this influence through an in-depth study of the World Bank’s Safeguards Review and Update, a four-year policy-making process that concluded in 2016. As alternative sources of finance carrying less stringent safeguard requirements than those of the World Bank proliferated in years preceding the Safeguards Review, borrowers gained negotiating power over Bank policy, enabling them to successfully push for more regulatory autonomy. These findings suggest that understanding the future of social-environmental standards in development finance institutions will require greater attention to new sources of finance and the power shifts they may entail.

Growing debt burden in low- and middle-income countries during COVID-19 may constrain health financing

ABSTRACT Debt burdens are growing steadily in Low- and Middle-Income Countries (LMICs), compounded by the COVID-19 economic recession, threatening to crowd out essential health spending. In 2019, 54 LMICs spent more on servicing their debt to foreign creditors than on financing their health services. While development loans may have positive effects on population health, the ensuing debt servicing requirements may have detrimental effects on health through constrained fiscal space for government health spending. However, the existing evidence is inadequate for an understanding of whether, and if so how and under what circumstances, debt may constrain government health spending. We call for more research on the impacts of debt on health financing and call on creditors and borrowers to carefully consider the potential impacts of lending on borrower countries’ ability to finance their health services.

The effects of IMF loan conditions on poverty in the developing world

Although the International Monetary Fund (IMF) claims that poverty reduction is one of its objectives, some studies show that IMF borrower countries experience higher rates of poverty. This paper investigates the effects of IMF loan conditions on poverty. Using a sample of 81 developing countries from 1986 to 2016, we find that IMF loan arrangements containing structural reforms contribute to more people getting trapped in the poverty cycle, as the reforms involve deep and comprehensive changes that tend to raise unemployment, lower government revenue, increase costs of basic services, and restructure tax collection, pensions, and social security programmes. Conversely, we observe that loan arrangements promoting stabilisation reforms have less impact on the poor because borrower states hold more discretion over their macroeconomic targets. Further, we disaggregate structural reforms to identify the particular policies that increase poverty. Our findings are robust to different specifications and indicate how IMF loan arrangements affect poverty in the developing world.Supplementary InformationThe online version contains supplementary material available at 10.1057/s41268-022-00263-1.

Applicability to the Polak Model as a Factor Affecting the Outcome of Austerity Policies

Many of the IMF’s loans to struggling countries require the borrowing country to implement austerity. A set of policies meant to restore a country’s economy and ensure that the IMF’s loans are effective. Though the policies work in some countries, in others they lead to economic decline. As the IMF continues to place austerity it is important to understand factors that could be affecting the outcome of these policies to prevent economic disaster. We theorize that the Polak Model, an economic model underlying the justification behind austerity, doesn’t apply to all countries, leading to poor economic policy due to an incorrect understanding of a country’s economy. To test if applicability to the relations outlined by the Polak Model is a key variable leading to the mixed outcomes of austerity we examined countries where austerity was detrimental (Greece and Argentina) and countries that were better off after austerity (Estonia and Croatia) by reviewing existing research on the countries’ economies’ application to the Polak Model and outcomes of austerity measures in those countries. We hypothesize that if austerity measures were detrimental to a country’s economy, then it would fail to fit the Polak model while a country that improved following austerity would fit the model. We find that our hypothesis is supported, indicating that the IMF must evaluate to which countries the Polak Model applies before pushing austerity instead of assuming that the model holds true for all countries and implementing ineffective policy based on flawed economic reasoning.

The West’s Teeth: IMF conditionality during the Cold War

AbstractDid the International Monetary Fund (IMF) play a role in the United States and its Western allies efforts to contain the advance of communism during the Cold War? To answer this question, we construct a new database containing the number of conditions applied to over 500 IMF loans since 1970 and analyse how the distance from a borrowing country to its closet communist neighbour affected the IMF conditionality. We show that the Fund imposed fewer conditions on loans to countries geographically closer to the communist bloc. Results are stronger when neighbouring communist countries were not part of the Warsaw Pact. This pattern persisted during the 1990s, when the Fund helped former communist countries in their transition to market economies. However, we find no strong evidence of such discretionary treatment by the IMF after 2001, when the containment of communism had ceased to be the West's top priority.