The Political Economy of Chinese Debt and IMF Conditionality

26 Pages Posted: 2 Nov 2021

See all articles by Andreas Kern

Andreas Kern

Georgetown University - McCourt School of Public Policy

Bernhard Reinsberg

University of Cambridge; University of Glasgow - School of Social and Political Sciences

Date Written: October 27, 2021

Abstract

Despite a substantial literature on IMF programs, little is known about whether and to what extent Chinese loan exposure shapes IMF program design. Our starting point is that Chinese loans are tied into projects that promise to generate sufficient revenue to repay these loans and entail elite kickback schemes. We expect that governments turn to the IMF for bailout funding when a severe shock erodes the value of the underlying loan collateral requiring to mobilize revenues and implement austerity measures. Anticipating fierce domestic resistance, the IMF becomes the politically most viable option to absorb the domestic political heat while allowing to retain elite kickback schemes. As a result, we expect governments to accept a `whatever-it-takes' number of loan conditions. Using cross-country time series analysis for up to 162 countries between 2000 and 2018, we show that defaults on Chinese debt trigger IMF programs only when a country experiences a severe adverse shock. Countries tapping the IMF also accept a greater number of loan conditions. From a policy perspective, our findings are a call for targeted governance reforms of the global financial safety net that go beyond program safeguards and loan conditions fostering sovereign debt transparency.

Keywords: IMF, IMF conditionality, Chinese loans, financial distress

Suggested Citation

Kern, Andreas and Reinsberg, Bernhard, The Political Economy of Chinese Debt and IMF Conditionality (October 27, 2021). Available at SSRN: https://ssrn.com/abstract=3951586 or http://dx.doi.org/10.2139/ssrn.3951586

Andreas Kern (Contact Author)

Georgetown University - McCourt School of Public Policy ( email )

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Washington, DC 20057
United States

Bernhard Reinsberg

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

University of Glasgow - School of Social and Political Sciences ( email )

United Kingdom

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