Evaluating Alternative Explanations

This chapter evaluates alternative explanations for differences in borrowing portfolios across developing countries. The analysis suggests that borrowing portfolios result from the interaction of supply- and demand-side factors, through their relative importance differs across creditors. Loans from private creditors are more heavily shaped by creditors’ preferences, while recipient preferences strongly affect borrowing from public creditors. The analysis finds no evidence that recognizing Taiwan negatively affects the loan volume obtained from China. Recipient governments do not appear to decide among creditors based on the interest rate of loans offered. Borrowing portfolios do not depend on the use to which the loan is put as differences in borrowing portfolios across coalitions remain irrespective of infrastructure needs, humanitarian emergencies, and debt crises. This suggests that recipients do not use particular creditors for specific projects. Lastly, domestic political considerations appear more important in determining governments’ borrowing decisions than their ideological alignment with creditor governments.

Measuring Borrowing Portfolios and Group Strength

This chapter describes how data for the statistical analysis were obtained. First, the dependent variable captures countries’ borrowing portfolios, that is, the share of loans obtained from a particular type of creditor. The main difficulty lies in obtaining reliable data on loan inflows from emerging creditors, such as China. In contrast to existing approaches focused on loan outflows from China, this book instead collects information on the loan inflows as recorded in the budgets of recipient countries. Second, the key independent variable is the type of societal coalition. The relative political strength of Labor, Industry, and Finance determines which type of coalition is present. However, their relative political influence cannot be observed directly. The chapter describes how proxies were derived by combining information about the groups’ ability to overcome collective action problems with their importance to the domestic economy.

Generalizing the Findings with Statistical Analyses

Qualitative evidence is useful in tracing the process by which borrowing decisions are made. However, the question is how generalizable the findings from Ecuador, Colombia, and Peru are to other developing countries. Statistical analyses can provide insights into whether domestic political dynamics within recipient countries affect borrowing portfolios across developing countries. This chapter describes three challenges that need to be resolved before such analyses are possible: First, data on incoming loans must be obtained, which is particularly difficult for Chinese loans. Second, estimating the political strength of societal interest groups is challenging, as it cannot be observed directly. Third, analyzing a compositional variable (i.e., the loan shares of four creditors that must add up to 100%) presents a methodological challenge: increasing the share of loans obtained from one type of creditor must be matched by a corresponding decrease in the share of loans obtained from other creditors.

Colombia

A Capital Coalition between Finance and Industry dominates the political landscape of Colombia, while Labor is comparatively marginalized. Both groups are alarmed by the prospect of increased Chinese competition. Moreover, both prefer the government to borrow from the capital market even if cheaper loans from public sources are available. Interviews suggest that Colombian politicians are well aware of the dominant groups’ preferences. Consequently, politicians are ready to act upon the interests of the Capital Coalition when making borrowing decisions. The qualitative evidence suggests that Chinese loan offers are significantly disadvantaged with respect to both loans for general budget expenditures and loans for financing specific infrastructure projects. As a result, Colombia has rejected several Chinese loan offers and instead relies on private creditors for its financing needs.

How Governments Choose Their Creditors

This chapter introduces a demand-side theory to explain how governments choose their creditors. Labor, Industry, and Finance are important interest groups in recipient countries. Their governments can borrow from four types of creditors: Western governments, BRIC governments, multilateral institutions, and private creditors. These creditors may offer the same loan amount, but the strings attached to their loans differ. Therefore, the expected distributional consequences of a particular loan differ across domestic interest groups. Policymakers try to satisfy the two most influential groups simultaneously by borrowing from the creditor that is jointly preferred by both groups. A government will rely on loans from BRICs if a Corporatist Coalition between Labor and Industry dominates the political landscape. In contrast, governments will tend to borrow from private creditors if a Capital Coalition between Finance and Industry predominates, but will obtain loans by Western governments if faced with a Consumer Coalition between Labor and Finance.

Explaining Variation in Borrowing Portfolios

This chapter illustrates that borrowing patterns differ significantly across developing countries, even if they have the same credit rating, income level, and degree of democracy. Some rely on private creditors, others on multilateral institutions; some use loans from Western governments like the United States, while others borrow from emerging creditor governments such as China. These empirical patterns suggest that it is not only creditors who determine loan allocations, but that recipient governments have preferences and act upon them. This book argues that governments choose their creditors to satisfy the demands by the dominant societal interest groups. These groups prefer one type of creditor to others because the conditions attached to the monetary transfers imply positive (or negative) distributional consequences for the groups. The chapter concludes with a preview of the qualitative and quantitative evidence presented later in the book.

Peru

A Consumer Coalition characterizes Peru. Labor and domestic Finance dominate the political landscape, while domestic Industry is relatively weak as a result of the economic crisis in the 1990s. Interviews reveal that both Labor and Finance prefer bilateral loans from Western governments. While Labor is less enthusiastic about private creditors than Finance, recent experiences with hyperinflation resulted in congruent preferences regarding this creditor as well. Qualitative evidence shows that Peruvian politicians are acutely aware of the need to satisfy the demands by local banks as well as the general population. Interviews suggest that politicians have much influence over the process of making borrowing decisions, allowing them to significantly shape the borrowing strategy. As a result, Peru relies more on bilateral loans from Western governments than its neighboring countries. It also uses private creditors, while loan offers by the Chinese government are rejected.

Why Greater Choice Matters for Developing Countries

This chapter reviews the findings from the qualitative and quantitative analyses and discusses key implications. The results provide insights into the competition between traditional and emerging creditors. It is unlikely that BRIC lenders will change their loan conditions match to those of Western creditors. Similarly, multilateral creditors are unlikely to abandon economic conditions as part of their loan offers just to make their loans more attractive. As a result, the theory predicts that the clientele of lenders will become more polarized across creditors and more homogenous for each individual creditor. At the same time, the findings suggest that the emergence of new creditors has increased the room to maneuver for developing countries. With respect to economic development, this means greater autonomy to choose between a neoliberal approach and a state-led industrialization model akin to that of the East Asian Tigers. With respect to democracy, the findings could imply that Chinese loans might actually promote democracy.

Ecuador

A Corporatist Coalition characterizes Ecuador, as Labor and Industry are the dominant political actors, while Finance is marginalized. Interviews with representatives of these groups demonstrate that they have a strong preference against loans from multilateral organizations such as the World Bank and the IMF. Instead, both groups expect to gain material benefits with loans from the Chinese government. The qualitative evidence shows that Ecuadorian politicians know of these preferences among Labor and Industry. They are responsive to the demands of the Corporatist Coalition to increase the chances of their electoral success. Furthermore, interviews show that borrowing decisions are not a technocratic exercise, but rather the result of an explicitly political process that allows politicians to influence which creditor is used. As a result, the Ecuadorian government rejected loan offers by multilateral organizations and Western governments, and instead borrowed from China and Brazil.

Governments’ Borrowing Decisions across the Developing World

Societal coalition shape governments’ borrowing decisions across the developing world. The analyses use a compositional data model to estimate the effect of societal coalitions on the share of loans obtained from four types of creditors. The results indicate that borrowing portfolios differ significantly across coalitions: Corporatist Coalitions rely primarily on BRIC loans, Capital Coalitions on private creditors, Consumer Coalitions on bilateral loans from Western governments. These differences remain significant after controlling for economic factors (recipient GDP, current account, existing debt levels, trade, and natural resources) and political considerations (democracies versus autocracies, type of electoral system, or government ideology). Furthermore, the results are robust to analyzing China separately from Brazil, India, and Russia, as well as when combining Western bilateral with multilateral loans. The evidence strongly supports the argument that developing countries make choices among competing loan offers.