Working Papers

"The Rise of Patient Capital: The Political Economy of Chinese Global Finance."

Institute for International Economic Policy (IIEP) Working Paper, no. 2018-2.

Presented at the annual meetings of the American Political Science Association (APSA), the International Studies Association (ISA), the Latin American Political Economy Network (REPAL), and the Latin American Studies Association (LASA).  

– Top 10% most downloaded papers on the Social Science Research Network. 

This paper contents that China’s state-led capitalism is an important form of patient capital, characterized by a longer-term horizon. While technically classified as mobile capital, its higher risk tolerance and geopolitical shrewdness make state-owned capital less likely to swiftly exit debtor countries. Compared to traditional mobile capital, debtor governments thus gain more policy freedom, particularly during hard times when Western creditors might otherwise impose austerity and other onerous policy conditions. Employing an originally constructed data index, the Chinese Global Financial Index, I conduct an econometric test across 15 Latin American countries from 1990-2015. I find that Chinese state-to-state lending reduces governments’ reliance on conditionality-linked Western financing, giving them more autonomy to use budget deficits to intervene in their economies. This effect is also contingent on partisanship, with extreme, or populist left governments being most likely to enhance their budgetary discretion. These results suggest that Chinese financing could be a development opportunity, but only if governments invest wisely. Otherwise, by lending without policy conditions, China may be encouraging developing country governments to spend without bounds, sowing the seeds for future debt problems.

"Global Contagion and IMF Credit Cycles: A Lender of Partial Resort?"

With Sujeong Shim

Presented at the 2021 meetings of the International Studies Association (ISA), the virtual meetings of the International Political Economy Society (IPES), the international relations colloquium at the University of Wisconsin-Madison, and the comparative politics workshop at George Washington University

The International Monetary Fund (IMF) has an incomplete governance architecture characterized by insufficient resources to fulfill its global financial stability mandate. We argue this institutional incompleteness influences how the IMF balances tensions between systemic risks and moral hazard, and when it surprisingly exits lending relationships. During high global contagion periods, the IMF targets stabilizing systemic risks to fulfill its mandate, granting large loans and overlooking non-compliance with conditionality.  However, when the IMF perceives minimal contagion risk, it focuses on moral hazard, extending smaller loans with stricter conditionality, and willingly cuts financial ties to preserve its reputation and resources for future crises. Employing a comparative case analysis of IMF decision-making for Argentina (1998-2001) and Greece (2010-2015), we find evidence supporting our theoretical priors from content analysis of IMF executive board meeting minutes, complementary archival evidence, and field research interviews.  These findings have important implications for the IMF, institutionalism, and development. 

Crude Credit: The Political Economy of Global Finance

and Natural Resource Wealth in Latin America

With Iasmin Goes

Presented at the 2021 annual meetings of the Latin American Political Economy network (REPAL).

Over the last several decades, the political economy scholarship has debated the extent of the natural resource curse in developing countries. Conventional wisdom suggests that an abundance of natural resources, such as oil and natural gas, yields developmental stagnation. However, recent empirical studies have found mixed results, showing that natural resources can at times be a blessing, conditional on local economic development. We offer new insights into this debate by incorporating the role of financial investors in intensifying natural resource market volatility. We argue that financial investors rely on global commodity prices as cognitive short-cuts to evaluate the likelihood of sovereign debt repayment, leading to greater risk-acceptance and lower financing rates for national governments during global commodity upturns.Exploiting information asymmetries between financial investors and local commodity suppliers, however, sovereign governments often condition their debt issuance on local production cues rather than global commodity prices.In an econometric test of 10 Latin American countries between 1996 and 2018, we show this divergent behavior of creditors and debtors. In a region known for its resource dependence, we find that financial investors use of commodity price heuristics can skew market sentiment and spark investor exuberance, while national governments are surprisingly more prudent, tending to limit their debt issuance when they have a higher production capacity. These findings have important implications for the study of globalization and development, demonstrating that financial markets – not sovereign governments – may lay the foundations of the resource curse by breeding over-optimism through easy credit.