Crude Credit: The Political Economy of Global Finance and Natural Resource Wealth

Non-renewable natural resources like oil, gas, and minerals have notoriously adverse effects on institutional quality. But in the wake of a commodity boom, when global liquidity is high, investors are more risk-tolerant and willing to lend to anyone — even to resource-rich countries with low-quality institutions. Investors might be eager to lend, but are resource-rich countries as eager to borrow? Despite the availability of cheaper credit, we argue that these countries are less likely to borrow from capital markets in times of boom, instead using resource rents to cover their financing needs. This is because rents, unlike bonds, generate additional fiscal space with no strings attached. Whereas bonds reduce the incumbent’s discretion over economic policy, rents increase it; all else equal, governments will favor the latter. Using data on 22 countries in Latin America and the Caribbean from 1996 to 2019, we show that governments issue bonds less frequently, and in smaller amounts, as their GDP share coming from resource rents increases or as oil and gas production increases. In bringing together two strands of research — on natural resources and sovereign debt — that have ignored each other, our analysis highlights the importance of treating different sources of public revenue as connected, rather than separate.