There is growing concern about the level of debt accumulated by countries such as Ghana and Zambia. In the latest in our popular Book Club feature, Jonas Bunte draws on his important work Raise the Debt to explain how African countries borrow money, who they borrow it from, and what this means.
African countries frequently borrow money. Governments can obtain loans from four different types of creditors. First, they can borrow from private creditors by issuing bonds. Second, they can obtain loans from international financial institutions such as the International Monetary Fund (IMF). African countries can also acquire bilateral loans from two types governments: Traditional western creditor governments, such as the United States and German, as well as emerging lenders, such as Brazil, Russia, India and China (BRICs).
Interestingly, governments vary with respect to the creditors they use. Figure 1 displays the frequency with which a particular set of creditors was used between 2004 and 2015. For instance, among governments utilizing a single creditor in a given year, 13.7% of borrowers obtained only BRIC loans while 11% received loans from western governments (DACs). Among governments that borrowed from two creditors, 9.1% used both BRIC and DAC creditors. The graph illustrates the remarkable heterogeneity in the set of creditors that developing countries use.
Why do some governments rely primarily on loans from western governments, while others prefer borrowing from BRICs? In my book “Raise the Debt: How developing countries choose their creditors” I explore what explains this variation in the creditors used.
Answering this question is important, for three reasons. First, some analysts fear that BRIC loans can provide developing countries with the means to avoid the “harassment” of countries whose foreign policy clashes with that of the United States or Europe. Second, the rise of BRIC lending might allow developing countries avoid neoliberal Washington Consensus and pursue alternative models of economic development. A third implication concerns the prospects for democracy in developing countries. For example, Chinese loans might undermine movements towards democratization in poor countries.
Importantly, we know little about the motivation of governments to choose Chinese loans over other creditors. We need to understand why governments accept Chinese loan offers (while others reject them) before we can understand the likely consequences for power, economic development, and democracy.
The prevailing explanation for the divergent sources of funds focuses on the role of creditors. According to this view, creditors, and creditors alone, decide whether to supply a loan to a particular developing country. I do not dispute that some countries may have better access to particular creditors than others. More democratic governments, those with better credit ratings, and those with higher levels of development, are probably more attractive to potential creditors.
However, I argue that such characteristics do not pre-determine borrowing portfolios. Even if I acknowledge that some governments have better choices than others, comparing countries with access to similar alternatives reveals significant variation. Take Uganda and Rwanda: In 2013, these neighboring countries in East Africa had similar credit ratings (B+ and B, respectively), comparable levels of economic development (GDP per capita of $424 and $473), as well as similarly unfavorable democracy scores (-1 and -3, respectively). Given these resemblances, we would expect both countries to have access to the same set of creditors. Yet, their borrowing decisions differed: While Rwanda attracted more than $3bn of orders for its $400m 10-year bond sale at an interest rate of 6.875%, the Ugandan government announced that it had decided not to issue bonds in international financial markets. In communicating this decision, the Ugandan Ministry of Finance, Planning and Economic Development noted that “sovereign bonds are expensive, and [it] is concerned that public debt could rise to unsustainable levels during currency depreciation, increasing bond yields.” Instead, Uganda obtained several bilateral loans. Figure 2 presents more systematic data to show that the level of Democracy, for example, does not predetermine which type of creditor is primarily used.
Against this background, I argue that supply-side approaches must be complemented with a demand-side perspective. We know that African countries are not passive recipients. I take issue with the assumption that recipients are merely passive actors happily gobbling up whichever loan happens to be offered. Rather, their governments have preferences, and they have the political will to act upon them. For this reason, my book offers a demand-side theory of borrowing to complement existing supply-side approaches.
I argue that a government’s choice among competing creditors can be explained by the distributional consequences of loans and social coalitions in the recipient country. The term `distributional consequences’ refers to the way in which economic decisions create winners and losers. For example, the IMF and China might offer a government exactly the same loan volume — but with different strings attached. For example, IMF loans typically come with conditions that require the recipient government to balance the budget, liberalize the economy, and avoid inflation. The domestic financial sector in the recipient country presumably likes such conditionalities, as it has an interest in a stable banking sector and low inflation. In contrast, Chinese loans are often attached to particular investment projects. This implies increased competition for the domestic financial sector, as an external actor now finances investment projects that it previously funded. The differences in conditions attached to these loans imply that the IMF loan would have positive distributional consequences for the domestic financial sector, while the distributional consequences of the Chinese loan for Finance would be negative. Even though the IMF and the Chinese offer the exact same amount of money, Finance prefers the IMF loan to the Chinese loan.
In contrast, domestic workers might prefer the Chinese loan to the IMF loan. As mentioned above, the conditions attached to IMF loans require the recipient government to balance its budget; in many cases this is accomplished by cutting social expenditure. Similarly, the requirement to liberalize the economy does not always have positive consequences for workers. For these reasons, the distributional consequences of an IMF loan for labor are negative. The opposite might be the case with loans from China. If Chinese loans are associated with additional investment projects that would not materialize otherwise, these loans might provide new employment opportunities for workers. For these reasons, Labor would prefer a loan from China to an IMF loan.
My book shows that borrowing portfolios systematically vary with the strength of domestic interest groups. Using statistical analyses and extensive interview data, I provide evidence that governments cater to whichever domestic interest group is politically dominant when deciding between competing loan offers.
“Raise the Debt: How developing Countries Choose their Creditors” is available at Oxford University Press for $20 with Coupon Code “ASFLYQ6”
Jonas Bunte is Assistant Professor of Political Economy at the University of Texas at Dallas.