Abstract
Despite the deepening of interdependence, international institutions are becoming increasingly fragmentary and unable to coordinate states’ policy choices. Such a coordination failure is serious in the realm of developmental finance, where major states vie against one another in extending loan contracts to developing states through separate institutions. Competitive lending is a double-edged sword: on the one hand, it may satisfy strong credit demands for infrastructure improvement in the developing world, while, on the other, it may also generate excessive lending and borrowing, increasing the risks of repayment difficulty and even sovereign debt default. Using a model of common agency, we analyze (1) how two lenders issue loan contracts with a single borrower to induce the foreign policy behaviors they prefer and (2) how the borrower determines its foreign policy to maximize loans. The analysis hypothesizes that, when the borrower assumes foreign policy neutralism, the lenders issue greater loan contracts than what they believe are optimal and that this excess persists as long as the lenders refuse to delegate the lending tasks to a common international financial institution that can sort out their varying preferences and provide common-agency control. We test this hypothesis against quantitative data pertaining to Cold War experiences and provide qualitative evidence on American and Soviet foreign economic policies. Our analytical results have implications for historical and contemporary Asian political economy.
Earlier versions of this chapter were presented at the International Workshop on Security and Economy in Tokyo on January 31, 2016, the International Political Economy Workshop in Kyoto on March 4, 2016, and the Annual Conference of the International Studies Association in Atlanta on March 19, 2016. The authors thank the conference and workshop participants and Professor Akira Okada for their comments.
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Notes
- 1.
One remotely related study is Drezner (2007), who analyzes a case of two major states coordinating their choices in setting up international standards. Unlike our analysis, this study omits international institutions as an intermediary for coordination and the response of a third-party.
- 2.
In the similar policy domain of foreign economic aid, many analysts have examined how donor states utilize aid money to promote their geopolitical and commercial interests and have also evaluated donors’ creative strategies such as earmarking and trust funds (Alesina and Dollar 2000; Burnside and Dollar 2000; Dietrich 2013; Eichenauer and Reinsberg 2016; Knack 2014). However, they have not investigated the process and consequence of aid competition between donors with divergent interests. Our analysis helps fill this analytical lacuna.
- 3.
More precisely, our complete-information model of common agency generates inefficiency solely from an inter-principal coordination failure, not from incomplete information.
- 4.
The data are obtained from the following sources:
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1.
US grant aid and loans from the United States Agency for International Development (https://www.usaid.gov/results-and-data, last accessed on March 1, 2016).
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2.
GDP and population from the World Development Indicators provided by the World Bank (http://data.worldbank.org/data-catalog/world-development-indicators, last accessed on March 1, 2016).
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3.
Ideal points from the United Nations General Assembly Voting Data by Eric Voeten (https://dataverse.harvard.edu/dataset.xhtml?persistentId=hdl:1902.1/12379, last accessed on March 1, 2016).
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1.
- 5.
The statistical analysis of Carbonnier and Voicu (2014), using a larger dataset with 15 OECD donors and 162 recipients covering 1972–2011, found that, in general, aid by rich Western states, including the United States, is correlated positively and significantly with the NAM.
- 6.
As an example, we cite data on Soviet grant aid and loans to Indonesia (Boden 2008, pp. 116–7). From 1959 to 1965, Indonesia received an extraordinarily large share of Soviet aid. The Soviet Union supplied Indonesia with 789 million rubles’ worth of assistance during those years, more than one-fifth (21 %) of the total amount provided by Moscow to all non-socialist developing states. The assistance provided to Indonesia was mostly in the form of loans, which outweighed grants by roughly 14 to 1. Soviet experts insisted that effective aid had to take the form of loans rather than grants.
- 7.
Correspondingly, from 1950 to 1965, the United States provided Indonesia with some $650 million in aid, consisting of $387 million in loans and $264 million in non-reimbursable grant money. Of the $650 million total, about $68 million was in military aid. US aid declined precipitously after 1963, when the regional communist movement Konfrontasi escalated; in 1964, the total was $40 million; in 1965, the number was actually negative (presumably because Indonesia made repayments; Webster 2009).
- 8.
Bader (2016) also compares the contemporary Chinese financial initiative to the medieval tributary system.
- 9.
“ADB Says will Maintain Standards When Cooperating with AIIB,” Reuters, May 2, 2015 (http://www.reuters.com/article/us-asia-adb-aiib-idUSKBN0NN07920150502, last accessed on July 26, 2016).
- 10.
Michael Martina and Wroughton, “Diplomatic Win for China as ASEAN Drops Reference to Maritime Court Ruling,” Reuters, July 25, 2016 (http://www.reuters.com/article/us-southchinasea-ruling-asean-idUSKCN1050F6, last accessed on July 26, 2016).
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Suzuki, M., Iida, K., Doi, S. (2017). Analyzing International Developmental Loan Markets with Rival Lenders. In: Suzuki, M., Okada, A. (eds) Games of Conflict and Cooperation in Asia. The Political Economy of the Asia Pacific. Springer, Tokyo. https://doi.org/10.1007/978-4-431-56466-9_10
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