How Governments Choose Their Creditors

Abstract

This chapter introduces a demand-side theory to explain how governments choose their creditors. Labor, Industry, and Finance are important interest groups in recipient countries. Their governments can borrow from four types of creditors: Western governments, BRIC governments, multilateral institutions, and private creditors. These creditors may offer the same loan amount, but the strings attached to their loans differ. Therefore, the expected distributional consequences of a particular loan differ across domestic interest groups. Policymakers try to satisfy the two most influential groups simultaneously by borrowing from the creditor that is jointly preferred by both groups. A government will rely on loans from BRICs if a Corporatist Coalition between Labor and Industry dominates the political landscape. In contrast, governments will tend to borrow from private creditors if a Capital Coalition between Finance and Industry predominates, but will obtain loans by Western governments if faced with a Consumer Coalition between Labor and Finance.