Patronage by Credit: International Sources of Patronage Spending in Developing Countries∗

To what extent do international financial fluctuations influence patronage politics in developing countries? While many scholars have analyzed the sources of patronage and how it can be detrimental for both economic development and democracy, patronage politics has been analyzed as a purely domestic phenomenon. This ignores, however, the consequences of international markets fluctuations, and in particular, how they may impact the financial resources available to a politician. In this paper, I argue that patronage activities can be funded by borrowing funds from the credit market, and consequently, international financial markets exert an indirect influence on patronage politics. I test this argument by examining the effects of the plausibly exogenous U.S. Federal Reserve policy on patronage policies at the subnational level in Argentina and Mexico. Evidence shows that (i) politicians use public debt to fund their public employment spending, and that (ii) the extent to which they are able to do so is influenced by the international financial market. Substantively, a 1 percentage point decrease in the Fed interest rate leads to a 3.6% [95% CI: 1.4 5.8] increase in public employment spending in Argentina and a 2% [0.7 3.4] increase in Mexico. Finally, I find no significant results when analyzing a placebo test on public goods spending. ∗I thank Michaël Aklin, Vicky Murillo, Peter Rosendorff, David Stasavage and participants at the NYU Political Economy Breakfast for helpful comments and discussions. All errors are mine. †Department of Politics, New York University. Contact: [email protected].