Interests over institutions: Political‐economic constraints on public debt management in developing countries

Abstract

Some use the model of independent central banks to posit that independent Debt Management Offices (DMOs) can enhance public debt sustainability. This study argues this is unlikely in developing countries. Developing country DMOs have limited space to apolitically manage (a) debt levels and (b) borrowing strategies. A comparison of South Africa and Botswana, using in‐depth interviews and primary sources, traces public debt processes to argue DMOs are unlikely to significantly affect the link between political interests and these two key public debt outcomes over time. This argument has three implications. First, it gives rise to questions about the role of institutions in the governance of public debt. Second, it adds to recent literature on developing country external borrowing preferences by highlighting ideological effects. Third, it reinforces the idea that political economy theories of the relationship between interests, institutions, and policy outcomes should vary by policy area and national income level.

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

“…Several studies examine how fluctuations in global liquidity affect investor behavior; I focus on the perceptions and behavior of borrowers. In so doing, I extend recent literature on the political determinants of borrowers' creditor choice (Arias, Mosley, and Rosendorff 2019; Bunte 2019; Cormier 2020), emphasizing the role played by global liquidity cycles.…”

“…This emphasizes that borrowers' choices matter. By focusing on sovereign borrowers and their perceptions, this study adds to a growing body of work that explains variation in developing countries' demands for external finance, rather than seeing patterns of sovereign debt as exclusively determined by creditors' willingness to lend (Arias, Mosley, and Rosendorff 2019; Bunte 2019; Cormier 2020). Secondly, the findings highlight how global liquidity affects the interaction between borrowing governments and their creditors, stressing the conditional nature of governments' perceptions of borrowing costs.…”

“…Unlike bond investors, donors attach conditions and performance criteria to concessional loans that entail scrutiny and constraint of government policy. Borrowing governments that are especially constrained by the requirements of IFIs—such as left-wing governments that diverge substantially from IFI prescriptions (Cormier 2020) or governments that lack the backing of influential IFI shareholders (Clark and Dolan 2021; Stone 2004)—will thus be especially attracted by bond finance flexibility during phases of greater liquidity. Even if borrower policy preferences sufficiently align with IFIs that adherence to loan conditions does not impose a substantial political cost, the transaction costs associated with the monitoring of IFI loans can make these unattractive compared to the flexibility of bond finance.…”

Partisan External Borrowing in Middle Income Countries

“…In practice, this partisan effect on MIC foreign borrowings occurs by constraining the work of government debt managers, who are technically responsible for negotiating sovereign debt contracts (see Sadeh and Porath 2020). But because partisan ministers must ratify annual borrowing plans, MIC debt managers cannot borrow from official creditors if their conditions would constrain the policies that the governing party is implementing (Cormier 2021). Across regions, there is qualitative evidence that this constraint on MIC foreign borrowings varies by partisanship.…”

“…Across regions, there is qualitative evidence that this constraint on MIC foreign borrowings varies by partisanship. Left-leaning governments keep South African public debt managers from using official credit because the "political transaction costs" of conditionality would be too high, while right-leaning governments in neighboring Botswana prefer official creditor policy reinforcement effects and price benefits (Cormier 2021(Cormier , 1182). Thailand's frequent shifts between left and conservative governments determine when debt managers do and do not use official creditors, as only when conservative parties take office does Thailand have an "interest in official credit"…”