Stephen B. Kaplan

The Political Economy of Sovereign Borrowing: Explaining the Policy Choices of Highly Indebted Governments

Political economy theory expects politicians to use budget deficits to engineer an election-timed boom, known as the political business cycle. We challenge and contextualize this view by incorporating the financial constraints faced by governments into an electoral framework. We argue that the extent of ownership dispersion among creditors has important effects for governments’ policy autonomy. Specifically, we contend that when highly indebted governments become more reliant on international bond markets – as opposed to traditional bank lending – politicians alter the way they respond to domestic constituents. In an econometric test of 16 Latin American countries from 1961 to 2011, we show that financial decentralization breeds austerity. More specifically, we find that politicians exhibit more fiscal discipline when they fund a greater share of their spending through decentralized bond markets. Furthermore, we find this disciplining effect to be particularly strong during election periods.

The Political Economy of Sovereign Debt: Global Finance and Electoral Cycles

Political economy theory expects politicians to use budget deficits to engineer an election-timed boom, known as the political business cycle. We challenge and contextualize this view by incorporating the financial constraints faced by governments into an electoral framework. We argue theoretically that the extent of ownership dispersion among creditors has important effects for governments’ policy autonomy. Specifically, we contend that when highly indebted governments become more reliant on international bond markets—as opposed to traditional bank lending—politicians alter the way they respond to domestic constituents. In an econometric test of 16 Latin American countries, from 1961 to 2011, we show that financial decentralization breeds austerity. More specifically, we find that politicians exhibit more fiscal discipline when they fund a greater share of their spending through decentralized bond markets. Furthermore, we find this disciplining effect to be particularly strong during election periods.

Banking unconditionally: the political economy of Chinese finance in Latin America

How does a shifting economic power balance between the United States and China affect the strategic choices of Latin American governments? During the last several decades, Latin America has often relied on a Western development model that aimed to attract global market capital. After excessive borrowing led to financial busts, however, many countries have sought to insulate themselves from market volatility. Rising terms of trade and a commodity boom, driven in part by China, helped buttress economic growth during much of the 2000s. But, what accounts for the growing variation in national policy approaches, ranging from ongoing market orthodoxy to heavy government intervention? I argue that governments that tap new Chinese income streams – both non-conditional lending and taxable commodity flows – have reduced their reliance on conditionality-linked Western financing, giving them more autonomy to use budget deficits to intervene in their economies. Employing a systematic comparative analysis of three Latin American countries – Argentina, Brazil, and Venezuela – I find that Chinese non-conditional funding endows governments with greater budgetary discretion, making austerity less likely. These findings offer important new insights for the study of globalization, the Latin American left, and China-Latin American relations, by helping explain the structural conditions that enable nations to veer from Western governance models.

The Rise of Patient Capital: The Political Economy of Chinese Global Finance

As the United States has retreated from its lead role in globalization -- first because of the 2008 financial crisis, and now under President Donald Trump’s leadership -- China has become a major global financial player. China, as the world’s largest saver, has rapidly expanded its cross-border lending since the crisis, more than doubling its overseas banking presence. This article develops a theory about how China’s emergence as a global creditor affects national policymaking. The international and comparative political economy literature has long-debated the extent to which international capital mobility constrains national autonomy, but has mainly focused on private capital flows. Incorporating China’s state-led capitalism into this political economy framework, I expect that Chinese credit enhances national governments’ room to maneuver. It is a distinct form of patient capital, characterized by a long-term horizon and a lack of policy conditionality, that endows governments with more fiscal space to intervene in their economies. Employing an originally-constructed dataset, the China Global Financial Index, cross-national tests (spanning 15 Latin American countries from 1990-2015) find that left governments tend to borrow directly from China when they can dilute market-oriented investment laws. However, independent of this partisan choice, Chinese state-to-state lending reduces reliance on conditionality-linked Western financing, leading to higher budget deficits

Fighting Past Economic Wars: Crisis and Austerity in Latin America

Political economy theory expects that changes in macroeconomic governance are often catalyzed by institutional factors, such as partisanship or elections. I challenge and contextualize this view by incorporating the role of technocratic advisors into a domestic policymaking framework. I contend that structural and elite-level explanations are also important to understanding ideational shifts, particularly in regions like Latin America that suffer from severe economic volatility. Presidents tend to govern from the lens of their crisis past, appointing economic hawks (or mainstream economists) who embrace austerity in the shadow of inflation crises, and economic doves (heterodox economists) who drift from budget discipline following unemployment shocks. Employing an originally constructed data index, the Index of Economic Advisors, I conduct a statistical test of 16 Latin American countries from 1960 to 2011, finding support for sustained idological shifts in technocratic composition and fiscal governance, based on the nature of past shocks.

Do Elections Hurt Developing Economies

Political economists debate the existence of a political business cycle (PBCs), in which politicians stimulate the economy to improve their re-election chances, only to cause a post-election slowdown. For developing countries, scholars have found evidence of election-year policy tinkering. Yet beyond this tinkering, perhaps elections have other important consequences. I test whether elections produce the harmful economic effects predicted by PBC theory. Using quarterly data from 47 democracies from 1993-2004, I do not find any evidence of negative outcomes. Instead, there is an unexpected variance correlated with institutional design. Elections and economic outcomes appear to have no relationship in presidential systems, but a positive and statistically significant relationship in parliamentary systems. I argue that the absence of PBCs reflects the difficulty in triggering booms before elections in open economies.