Shifting Political Influence? UN General Assembly Behavior during Debt Crisis

• In Event: Politics and Aid Effectiveness

Abstract

Highly indebted countries of the Global South are experiencing a debt crisis that risks economic hardship and political unrest, jeopardizing gains from economic liberalization. Driven by high global inflation, a strong US dollar and increasing efforts to ‘re-shore’ supply chains among advanced economies, there have been huge capital outflows. By October 2022, international investors had pulled 70 billion US dollars from emerging market bond funds, the worst reversal in 17 years. Many of the economic gains of the Global South were accompanied by the rise of China to the top of international development finance – China is now the biggest single creditor to low- and middle-income countries (The World Bank, 2023). The crisis has the potential to reveal how China’s rise to the top has affected its political influence in debtor countries. During past debt crises, it was Western governments who acted as lenders of last resort and coordinated their responses through the Paris Club. In contrast, Chinese bailouts are opaque, combine high interest rates with a lack of debt write-downs (Brautigam, Acker and Huang, 2020; Horn et al., 2023), and are not coordinated with other debtors. As vulnerable countries are seeking to avoid the worst effects of financial destabilization, Western aid is set to play a more important role again (albeit likely short lived). Along with it, Western donors might be better able to impose their policy preferences.
This paper uses currency crises resulting from adverse macro-economic shocks as identification strategy to explore how the rise of Chinese development finance reshapes power relationships between the West, China and countries of the Global South, looking at the initiation of draft resolutions at the United Nations General Assembly (UNGA) and voting behavior. It introduces two innovations: First, it casts the relationship between multiple donors and a recipient country in terms of a common agency problem. The paper presents the concept of policy discretion as central quantity that allows us to study the influence of creditors. The second innovation addresses the challenge of making causal inferences about the effects of debt owed to China and Western donors on political alignment. Threats to inference result from endogeneity of loan provision and political influence. Using a shift-share approach (Bartik, 1991), we interact indicators of US dollar strength with a country’s share of dollar-denominated debt to create an excludable instrument for currency crises. We find that countries who are highly indebted to China initiate UNGA draft resolutions only when they are part of a larger coalition of initiators. Experiencing a currency crisis changes this behavior, leading these countries to initiate by themselves or in smaller coalitions.
This paper adds an important facet to works that explore the implications of China’s rise as development finance provider for its political influence (e.g. Blair, Marty and Roessler, 2022; Dreher et al., 2022; Gelpern et al., 2022). It contributes to a larger literature on South-South aid (e.g. Amanor and Chichava, 2016; Kinyondo, 2019; Mawdsley, 2019) and adds a systematic empirical perspective to case studies that look at the agency of emerging market governments (Winters, 2012; Wethal, 2017). Not least, it provides a lens through which to analyze some of the political implications of the current debt crisis, which is still unfolding.

Author

• Martin C. Steinwand, University of Essex