
Contents
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2.1 Public Finance Dilemmas 2.1 Public Finance Dilemmas
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2.1.1 Domestic Resource Mobilization 2.1.1 Domestic Resource Mobilization
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2.1.2 External Resource Mobilization 2.1.2 External Resource Mobilization
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2.1.3 When are External Resources Preferred? 2.1.3 When are External Resources Preferred?
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Initial Conditions Initial Conditions
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Liquidity in Credit Markets Liquidity in Credit Markets
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Default Sanctions Default Sanctions
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2.2 Extreme Conditionality 2.2 Extreme Conditionality
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2.2.1 Why Accept Extreme Conditionality? 2.2.1 Why Accept Extreme Conditionality?
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2.3 External Finance and State Unmaking 2.3 External Finance and State Unmaking
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2.4 Foreign Finance and State Unmaking: The Case of Peru 2.4 Foreign Finance and State Unmaking: The Case of Peru
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2.5 Opportunities of State Building in the Era of International Finance 2.5 Opportunities of State Building in the Era of International Finance
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2.5.1 The Political Mechanism of Transmission 2.5.1 The Political Mechanism of Transmission
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2.5.2 The Bureaucratic Mechanism of Transmission 2.5.2 The Bureaucratic Mechanism of Transmission
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2.5.3 The Legacy of War Finance on State Building 2.5.3 The Legacy of War Finance on State Building
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2.6 Conclusion 2.6 Conclusion
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2.7 Appendix 2.7 Appendix
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2 A Political Economy of External Finance
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Published:August 2022
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Abstract
This chapter explores the political economy of public finance. It tackles the legacy of war finance on statebuilding. In response, foreign investors devised the mechanism of extreme conditionality in an effort to minimise risk. The chapter elaborates on the public finance dilemma of financing the war with taxes or foreign debts, which primarily correlates to the mobilization of significant resources addressing critical infrastructure, health crises and natural disasters to fund the government in a relatively short time. The chapter cites that rulers secure government funds through foreign loans while dodging political compromise and fiscal efforts required to establish allegedly good institutions.
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