Credit and debt are essential to economic development and modern governance. As a result, the variables that affect a state’s ability to borrow and the consequences of excessive borrowing are the subject of broad academic literatures in economics and political economy. Yet, scholars have had a blind spot in their approach to understanding the acquisition of debt. It was conventional, but untested, wisdom that all states had a similar preference ranking for the creditors from whom they would borrow. Private creditors, from banks or through bond issuances, are thought most preferred because their loans come with few strings attached and states are free to use the raised funds in any way they see fit. However, when states were deemed too risky and the cost of borrowing from private creditors was too high, they could potentially turn to official lenders, such as the IMF or World Bank, or bilateral loans for finance. However, as we know, these loans come with varying levels of policy concessions that can limit a government’s autonomy, or they are dedicated to funding a particular infrastructure project. Given these assumptions, the pairing of creditors and debtors was largely assumed to be a supply-side phenomenon dictated by the availability of private credit and the willingness of official lenders to engage with a particular country.
Jonas Bunte questions this conventional wisdom in Raise the Debt. His central contribution is the argument that the pairing of creditors and debtors is also driven by domestic politics in borrowing states. In other words, both demand-side and supply-side dynamics are at work in this process. To develop a framework for understanding the demand-side dynamics, Bunte applies the Open Economy Politics (OEP) toolkit to theorize about which domestic interest groups are the winners and losers of four types of external finance: private creditors, international financial institutions (IFIs), bilateral loans from Western states, and bilateral loans from either Brazil, Russia, India, or China (BRICs). He then theorizes that these preferences for different creditors will determine which financing strategies are most likely when these groups are part of a governing coalition. Bunte comes to several conclusions about the character of such ruling coalitions and their preferred creditors. First, corporatist coalitions (when labor and industry interest groups share power) prefer borrowing from BRICs. This is because labor is opposed to the conditionality of official loans from IFIs and industry benefits from the subcontracting from infrastructure projects that are commonly funded by bilateral loans. Second, consumer coalitions of labor and finance interest groups have a strong preference for bilateral loans from Western states, which generally emphasize social expenditure that benefits labor and come with good governance requirements that help impose macroeconomic discipline that aligns with financial industry interests. Last, a capital coalition of finance and industry has a strong preference for private sector loans and a weak preference for IFI loans given their strong conditionality that may reduce inflation and improve competitiveness.
Before starting his quantitative test of the theory with observational data, Bunte presents a plethora of interview evidence from three detailed case studies that serve to test his assumptions about the preferences of various interest groups. He should be lauded for his mixed-methods approach to testing the theory, which is rare in contemporary research. Interviews of government representatives and nonstate business actors in Ecuador, Colombia, and Peru show that, by and large, the preferences of these interest groups align with the theoretical expectations. Further, the case study evidence is also useful for demonstrating that states often do reject a method of finance such as private credit, even though it may be preferred, for options that might have previously been considered undesirable by comparison, such as IFI borrowing.
The book’s quantitative analysis is equally impressive. Bunte generates innovative measures to capture the size and strength of the corporatists, consumer, and capital coalitions described in his theory and demonstrates that, when different coalitions are in power, the source of borrowed funds change and do so largely in accordance with the theory.
This book makes a significant contribution to our understanding of government financing decisions. As such, its argument has implications not only for contexts where we are likely to see different types of borrowing but also, by extension, where we are likely to see the consequences of those different types of borrowing. For example, it gives us a better idea of which countries select IMF/WB lending, thereby enabling more accurate predictions of its effect on various outcomes. Perhaps most notably, the book gives us a better idea of how states will respond to the new competition posted by BRICs in official lending. Bunte’s analysis and evidence provide a solid foundation for understanding why some countries select BRICS, whereas others are happy to select Western lenders or eschew bilateral lending altogether. Scholars will now have to account for these demand-side factors when addressing issues of borrowing in future research.
Despite the book’s large contribution, some limitations need to be addressed. First, to derive interest group preferences for private credit (from either bonds or private banks), the book relies primarily on the costs each group would likely pay in the event of default (nonpayment). Default, although the topic of much research, is still a rare experience for most citizens. Thus, the significant costs of default are not a risk that most interest groups consider in the initial decision to borrow from private creditors. Further, these potential costs can come due quite far in the future, and it is likely that interest groups discount these potential future costs when weighing the choice among different options. The ambiguity regarding preferences for private sector lending is also apparent in the quantitative evidence, because the relationship between coalition strength and the private sector is not as strong as it is for demarcating differences in preferences for BRIC or IFI borrowing. As some of the interview evidence suggests, it may be that private credit remains supreme, at least when borrowing costs are reasonable, and that interest groups have the most important say in the decision of which official lending channel that states choose. Still, the book provides valuable information about the preferences across many other sources of credit and will serve as an indispensable contribution for scholars addressing the causes and consequence of sovereign lending.
