A "Western Advantage"? How Ties to the West Shape State Access to Capital

• In Event: International Political Economy Virtual Poster Session

Abstract

What determines state access to foreign capital? Credit access aids governments in financing national security, underwriting social spending, and cushioning the public against economic downturns. The COVID-19 pandemic further emphasized the importance of government borrowing, with many countries relying on bond issuance to fund relief efforts. However, not all states can tap into global capital markets, and how states entice investors to lend to them under global conditions of anarchy remains debated. While conventional explanations stress reputation, regime type, and macroeconomic fundamentals, this paper argues that government access to capital is largely explained by underlooked political heuristics, including: (1) maintaining close diplomatic ties with Western capital-rich states; and (2) allegiance to neoliberal ideas as espoused by Western-led international organizations (IOs). These diplomatic and ideational ties with the West send positive signals to market actors that the borrowing state’s default risk is low, and that financial assistance can be expected from Western states if the borrowing government cannot immediately repay its debts. I test this argument by constructing a new dataset, the United States Economic Diplomacy (USED) Data, which codes over 5,000 in-person meetings between the U.S. President, U.S. Treasury Secretary, and high-level foreign policymakers from 1980 to present. The USED Data represents a highly refined measure of U.S. foreign diplomacy that is a significant improvement from existing datasets, including the Correlates of War (COW) Diplomatic Exchange Data and the Diplomatic Contacts (DIPCON) database, which only measure formal diplomatic representation at five-year intervals. To measure the adoption of neoliberal ideas by foreign governments, I also expand existing data on the educational background of finance ministers and central bank governors from 66 different borrowing countries. The statistical results indicate that maintaining diplomatic contact and ideational similarities with the West significantly improves a country’s access to sovereign bond markets. This relationship is particularly pronounced when global liquidity is low and investors consequently become more risk averse.

Author

• Brendan J. Connell, University of Colorado Boulder