The paper shows that unstructured lending from international credit markets can create incentives to loot the country; and an enhanced likelihood of looting causes greater political instability, and diminishes growth.
We develop a dynamic discrete choice model of an unchecked ruler making decisions
regarding the development of a resource rich country. Resources serve as collateral
and facilitate the acquisition of loans. The ruler chooses either to stay in power while facing
the risk of being ousted, or loot the country’s riches by liquefying the resources through
lending. We show that unstructured lending from international credit markets can create incentives
to loot the country; and an enhanced likelihood of looting causes greater political
instability, and diminishes growth. Using a treatment effects model, we find evidence that
supports our predictions.
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