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Working Papers

"Crude Credit: The Political Economy of Global Finance

and Natural Resource Wealth in Latin America" Revise & Resubmit

With Iasmin Goes

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

Oil, gas, and minerals have notoriously adverse effects on institutional quality. But when global liquidity is high, risk-tolerant investors are more willing to lend to all borrowers, even resource-rich countries with low-quality institutions. Despite the availability of cheaper credit during commodity booms, we argue that countries do not increase current borrowing to mitigate future revenue shortfalls during commodity busts. Instead, they rely on resource windfalls to meet their current financing needs, fearing they would otherwise forfeit national policy discretion to global financial markets. We leverage primary evidence from extensive field research across five Latin American countries to show that national economic officials (i.e. finance ministers and central bank governors) are wary of high indebtedness, after past commodity booms ended in cycles of lofty spending, borrowing, and default. For sovereign borrowers, high bond market indebtedness often reduces government discretion over economic policy, whereas windfalls increase it; all else equal, national governments will favor the latter. Using data on 22 Latin American and Caribbean countries from 1996 to 2020, we find that governments issue bonds less frequently, in smaller amounts, as their GDP share from resource rents or oil and gas production increases. These findings make an important contribution to our understanding of how commodity cycles affect global capital markets: sovereign borrowers do not fully leverage commodity booms to expand their fiscal space or budgetary room to finance more spending over time.

"Banking on the State: The Competitive Advantage of State-Led Financing." IIEP Working Paper.

With Aparna Ravi

Presented the paper at the 2023 Politics of Industrial Policy Conference at Princeton University's Niehaus Center of Globalization and Governance (NCGG), and the 2022 annual meetings of the International Studies Association (ISA).

How has the rise of state-led capitalism affected national competitiveness across a global marketplace historically characterized by private sector activity? Under the banner of the Belt and Road Initiative and Made in China 2025, China promotes overseas investments through its national development banks. We argue that China’s state-backed credit is a competitive advantage, incentivizing other national governments to deploy development finance to help firms capture market share internationally. We develop a new theory of global development finance, suggesting that the emergence of China’s state-led financing has increased cross-border overseas banking competition, and yielded a higher prevalence of state-led financial activity internationally. Building on the seminal globalization literature, we anticipate that this diffusion reflects global capital competition and peer emulation, but on a more limited financial scale compared to China. 

Employing national development banks as our unit of analysis, we identify three key state-led financial instruments: development finance loans, export credits, and state-backed equity investments. After constructing an original index of these state banking tools, we conduct a comparative case study analysis of the BRICS economies, given their growing role in the international financial architecture. We find a higher frequency and scale of state-led versus market-based instruments over time that also correlates with greater economic competition with China in key national strategic sectors. 
 

"Waiting for Growth: The Political Economy of China’s International Debt in the Americas."

Institute for International Economic Policy (IIEP) Working Paper.

Presented at the annual meetings of 2023 International Studies Association (ISA), the 2023 Latin American Political Economy Network (REPAL), and the Mortara Research Seminar at Georgetown University.  

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

Over the last half-decade, China has become the world’s largest official creditor amid mounting international debt difficulties. What is the relationship between China’s state-led finance, and growing debt distress? To answer this question, this paper develops a theoretical framework for global financial statecraft. The traditional approach to sovereign debt sustainability, led by the IMF and the Paris Club, emphasizes the short-term viability of sovereign borrowers by promoting financial disclosure and economic discipline. Debt crises are typically resolved when creditors forgive the debt they are owed, and sovereign borrowers use economic reform to stabilize their finances. China participates in such multilateral initiatives, signaling its willingness to be a global stakeholder, but often prefers bilateral discretion. State-backed lenders often wait for an economic recovery to generate new life into bilateral loans by restructuring loan terms, without recognizing bad debts or requiring significant reform.

Under what conditions do Chinese creditors opt for such bilateral discretion rather than multilateral debt relief? This paper hypothesizes that China is more likely to negotiate bilaterally, when China has a higher-level of financial statecraft, or a high-priority financial and commercial stake in its sovereign borrowers. Otherwise, when there is a low-level financial statecraft, where China invests in diplomatic prestige projects, overcapacity outlets, or infrastructure with low commercial stakes, China is more likely to favor the IMF taking the lead in debt negotiations. To examine these patterns, this paper conducts a multi-method analysis, using preliminary cross-national tests (spanning 18 countries from 1961-2021) and a comparative case analysis of two of China’s largest sovereign borrowers: Argentina and Ecuador. It finds that higher levels of financial statecraft breed a greater prevalence of bilateral restructurings. but also higher Chinese exposure to Latin America’s ongoing debt problems.

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