The financial statecraft of debtors – The political economy of external finance in Africa
Can borrowing governments play their lenders off against each other? I study this with respect to African governments, which have gained access to a far more diverse array of external finance over the last decade, including bilateral loans from China and through access to international bond markets.
I argue that a greater diversity of lenders increases the potential bargaining power of borrowers, but that actual success in leveraging alternatives into preferred negotiating outcomes varies based on the domestic drivers of borrowing and the strategic significance of borrowers to their lenders. I analyze the terms of development finance from traditional donors to show that these become more responsive to recipients’ preferences when recipient governments access alternative financing. Furthermore, I draw on extensive interview evidence from Ethiopia, Ghana, and Kenya to demonstrate how domestic political economy and strategic significance explain why some governments are more successful at financial statecraft than others.
The following paper is based on this research:
Emulation or Differentiation? China’s development finance and traditional donor aid in developing countries Revisions requested.
Foreign aid relationships are valuable to donors as a means of improving development outcomes and influencing recipient country policy. The emergence of new donors can lead to competition as donors vie for recipient governments’ attention. How does such competition affect the behavior of traditional donors toward developing countries? I draw attention to how the rise of China as a provider of development finance is changing the type of development that traditional donors support. Chinese development finance is particularly targeted at large infrastructure projects, and this focus can exert pressure on traditional donors. I suggest traditional donors can either emulate China’s approach to development, i.e. offer large, infrastructure-intensive projects, or differentiate themselves and specialize in alternative approaches to development, e.g. focus on governance and social sector interventions. I test this using data on the terms of World Bank, US, and Chinese development finance in over 100 countries. I find the World Bank responds to competitive pressure from China by emulating the Chinese emphasis on infrastructure, allocating a greater share of its development projects in infrastructure-intensive sectors in the year after recipient countries receive more Chinese development finance. Meanwhile, the US is less likely to respond to China’s increased presence. China’s growing role as a provider of development finance is affecting traditional donor behavior, shaping the type of development donors support by introducing bottom-up pressure at the recipient country level.
Cross-border banking, regulation, and developing countries
Why do countries converge on global standards? How does domestic political economy shape the applicability of international rules on banking? Do banks follow migrants? I have a series of papers explaining the spread and adoption of international banking regulation, especially in developing countries, as well as the determinants of the cross-border banking.
Regulatory convergence in the financial periphery: How interdependence shapes regulators’ decisions. With Emily Jones. Accepted, International Studies Quarterly.
We examine the processes through which regulatory norms and rules that prevail in the core of the global economy spread to countries in the periphery, focusing on Basel II banking standards. There has been no concerted campaign by standard-setting countries or international organizations to promulgate Basel II standards to countries in the financial periphery, yet they have spread nonetheless. We attribute this spread to the strong incentives generated by financial interdependence. Interdependence creates incentives for national regulators to adopt the banking standards that prevail in jurisdictions to which they are connected through the international activities of banks and transnational networks of bank supervisors. We test our argument by estimating a series of spatial lag and spatial autoregressive models, drawing on a new dataset of Basel II adoption. We find evidence that regulators in the financial periphery converge on the regulatory behavior of jurisdictions where their banks have foreign operations, and that regulators are influenced by the behavior of their peers in international networks. To a lesser extent, regulators are influenced by the behavior of regulators in the home jurisdictions of foreign banks, and the behavior of regulators in countries with whom they compete for investment.
The Limits of Globalizing Basel Banking Standards, Journal of Financial Regulation, Volume 3, Issue 1, 1 March 2017, Pages 89–124. With Emily Jones.
Though designed by a selective group of regulators from the world’s largest financial centres, Basel banking standards are being implemented far beyond the financial core, and this is often seen as confirmation of their global relevance. Yet, we show that the implementation of Basel II and III is shallow and highly selective in most countries outside of the Basel Committee on Banking Supervision. Drawing on primary and secondary sources and regression analysis, we attribute shallow and highly selective adoption to the sheer complexity of the standards, and the fact that they need substantial modification before they can be fully implemented, particularly in developing countries. Implementation challenges are compounded by gaps in the financial market infrastructure, notably credit rating agencies, as well as shallow capital markets. Beyond this, we attribute cross-country variation in implementation to differences in the underlying political economy of the banking sector. Countries are likely to pursue relatively high levels of Basel II and III implementation when large foreign and internationally active domestic banks operate in their jurisdiction and when they have a market-oriented approach to the financial sector. Conversely, countries are likely to pursue relatively low levels of implementation when they have few internationally active banks and a more interventionist approach.