Global Capital Cycles and Market Discipline: Perceptions of Developing-Country Borrowers

Abstract

Developing countries are often thought to be particularly exposed to the constraints of global markets. Facing scrutiny from foreign investors, why do developing-country governments enter international bond markets, especially when they can access cheaper finance from international financial institutions? I argue that borrowing governments' perception of market constraints depends on global liquidity. When bond markets are highly liquid, investors become more risk acceptant and governments perceive the political costs of borrowing to be lower, especially compared to the conditionality of concessional loans. I use data on the timing of bond issues and three case studies—Ethiopia, Ghana, and Kenya—to demonstrate that choices to issue debt were shaped by global liquidity. These findings nuance debates about how markets constrain governments, emphasizing that market constraints are conditional on systemic factors, including, global liquidity.

Partisan External Borrowing in Middle Income Countries

“…For left parties, the incentive to borrow more from markets than official creditors stems from the need to ensure they have space to implement policies that allow them to serve and maintain their core partisan base (see Lupu 2016). This counters arguments that governments representing labor avoid markets when they borrow (Bunte 2019), and aligns with work on how partisanship affects the currency composition of debt (Ballard-Rosa, Mosley, and Wellhausen 2021) while controlling for how global liquidity can also affect the decision to use official or market finance (Zeitz 2021).…”

“…First, it shows MIC governments' partisan class constituencies inform the sources of credit they prioritize when making annual external borrowing decisions. This adds to work on the politics of public debt structure, including how liquidity affects African government creditor choice (Zeitz 2021) and why partisanship affects the currency composition of bond issues in both rich and developing contexts (Ballard-Rosa, Mosley, and Wellhausen 2021). Second, it puts limits on the extent to which sovereign debt markets outside of the rich world discipline borrowers for core political constituencies and economic policy preferences.…”

Central bank independence in Latin America: Politicization and de‐delegation

“…Importantly, we consider the external, reputational costs of politicization and de‐delegation as consistently elevated in the past 3 decades due to the global norm status achieved by CBI. While financing pressure may vary for countries due global liquidity changes or lender characteristics (Kern and Seddon 2021; Zeitz, 2021), those external costs of trouncing the CBI norm have remained high in Latin America (Bodea & Hicks, 2018). This means reforms reversing delegation are never costless.…”

Central bank independence in Latin America: Politicization and de-delegation

“…Importantly, we consider the external, reputational costs of politicization and de-delegation as consistently elevated in the past 3 decades due to the global norm status achieved by CBI. While financing pressure may vary for countries due global liquidity changes or lender characteristics (Kern and Seddon 2021;Zeitz, 2021), those external costs of trouncing the CBI norm have remained high in Latin America (Bodea & Hicks, 2018). This means reforms reversing delegation are never costless.…”