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Can a new model of infrastructure financing mitigate credit rationing in poorly governed countries?

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  • Xu, Jiajun
  • Ru, Xinshun
  • Song, Pengcheng

Abstract

We explore why resource-financed infrastructure—whereby developing countries pledge future resource revenues to repay infrastructure loans—mitigates credit rationing in poorly governed countries. Using a novel project-level database, we find that the loan sizes for resource-financed infrastructure are much larger than those determined by the traditional government infrastructure purchasing model especially in poorly governed countries. We use the credit rationing model to explain these empirical patterns. The traditional government infrastructure purchasing model suffers from two limitations: the borrowing government may steal infrastructure funds, or fail to make a credible commitment to using taxation to repay its sovereign infrastructure loans. The new financing model solves such problems by allocating loans directly from the lender to the contractor minimizing government corruption, and channeling resource revenues into an independent escrow account to repay infrastructure loans. Our findings highlight that this new infrastructure financing model can alleviate credit rationing in poorly governed, resource-rich countries.

Suggested Citation

  • Xu, Jiajun & Ru, Xinshun & Song, Pengcheng, 2021. "Can a new model of infrastructure financing mitigate credit rationing in poorly governed countries?," Economic Modelling, Elsevier, vol. 95(C), pages 111-120.
  • Handle: RePEc:eee:ecmode:v:95:y:2021:i:c:p:111-120
    DOI: 10.1016/j.econmod.2020.12.001
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    2. Kodongo, Odongo & Mukoki, Paul & Ojah, Kalu, 2023. "Bond market development and infrastructure-gap reduction: The case of Sub-saharan Africa," Economic Modelling, Elsevier, vol. 121(C).

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    More about this item

    Keywords

    Infrastructure financing; Resource-financed infrastructure; Development banks; Public infrastructure; Credit rationing;
    All these keywords.

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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