COMPARATIVE INSTITUTIONAL ANALYSIS: The Politics of

• What are the goals of IMF programs?– Economic stability?

– Economic growth?

• Note that while originally intended to promote international economic stability, the IMF has become increasingly concerned with promoting growth and addressing poverty…

Our primary objective is growth… It is toward growth that our programs and their conditionality are aimed. It is with a view toward growth that we carry out our special responsibility of helping to correct balance of payments disequilibria and, more generally, to eliminate obstructive macroeconomic imbalances. When I refer to growth, I mean high-quality growth, not… growth for the privileged few, leaving the poor with nothing but empty promises.

– Michel Camdessus, former IMF Managing Director

What are the effects?HERE COMES THE BAD NEWS

• Lower economic growth.

• Growing consensus across the political spectrum.

The problem may be one of POLITICAL ECONOMY

• What role do politics play in international organizations?

• International politics– Friends of the United States get loans with weak

conditionality.– (E.g., UN Security Council members bribed???)

• Domestic politics– Governments use the IMF as a scapegoat to push

through policies that protect elites at the expense of labor and the poor

• We often hear that governments do not want conditions to be imposed.

• BUT “International negotiations sometimes enable government leaders to do what they privately wish to do, but are powerless to do domestically… this pattern characterizes many stabilization programs that are (misleadingly) said to be ‘imposed’ by the IMF.” (Putnam 1988)

• Note that IMF arrangements are a rare and strange breed of international arrangement.

• They are not ratified a priori.• A country’s finance minister “issues” a letter

of intent for the IMF’s approval.• Subsequently, the country is “under” an IMF

arrangement.• Although policy change may require

subsequent approval of other actors, the playing field has been changed.

• Suppose an executive proposes to reduce the deficit and faces a veto player who is opposed.

• If the government proceeds without the IMF, the proposal is vetoed.

• If the government enters an IMF arrangement requiring deficit reduction, vetoing becomes more costly (“rejection costs”).

• Veto player may accept a deficit reduction to avoid “rejection costs.”

Executive

Figure 1: The logic of bringing in the IMF

How does bringing in the IMF help push through economic reform?

Executive

Without the IMF

Veto player

Accept

Reject

Payoff to veto player-1 (change policy)

0 (maintain the status quo)

Figure 1: The logic of bringing in the IMF

How does bringing in the IMF help push through economic reform?

Executive

Without the IMF

With the IMF

Veto player

Accept

Reject

Payoff to veto player-1 (change policy)

0 (maintain the status quo)

-r (reject the IMF)

Figure 1: The logic of bringing in the IMF

Veto player

Accept

Reject

-1 (change policy) + loan

How does bringing in the IMF help push through economic reform?

• Note: the story requires a veto player opposed to the deficit reduction.

• What is a “veto player”? (Discuss.)

• The probability of such a veto player existing increases with the number of veto players.

• Hypothesis: As the # of veto players increases, the probability that the government wants an arrangement increases.

Compliance• Note that the IMF can be used as leverage

only if conditionality is enforced.

• Sometimes countries are given a free-ride. Conditionality is window dressing.

• Why?– International politics– Bureaucratic politics

International Politics• Is the IMF a tool of foreign policy for the US (as

well as Japan, Germany, France and UK)?

• Hundreds of anecdotes… Systematic evidence?

• Countries that vote with the G7 at the UN are more likely to receive an IMF program.

• Countries receiving US foreign aid receive lighter punishments for non-compliance.

• More US bank exposure, more IMF loans.

Putting the domestic and international stories together…

Favorable US interest in the country

Effe

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f dom

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inst

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Entering into IMF Programs:The effect of domestic politics depends on international politics

Bureaucratic politics• The “principal-agent” problem: A long chain of

command with little accountability.

• Perhaps the IMF is a power unto itself, seeking to maximize its budget.

• Seeks to loan as much as possible.

• Seeks to expand the contributions of member countries.

• The main condition it enforces on loan recipients: repayment.

So, the effects of the IMF• May be due to loans – propping up bad

governments/policies– International politics

– Bureaucratic story

• May be due to wrong policies– Bad IMF advice– And/Or partial reform

• Consensus that IMF programs historically did not help economic development

Korea presents a challenge• Sometimes politically important countries accept

IMF loans but follow sound economic policies.

• East Asian Tiger South Korea participated in IMF programs consecutively from 1965 to 1977

• The country’s strategic importance to the West during the Cold War may have improved the chances for the country to borrow from the IMF, but did not lead them to follow policies detrimental to long-run economic growth.

• Political importance and economic vulnerability may be the toxic mix

The debate

The left

• Bad policy advice

The right

• Policy advice is ignored– IMF lending goes to “strategically important”

countries – Or just any countries and the IMF doesn’t

enforce – bureaucratic story

• Loans subsidize bad policies and bad governments

Moderate view

• Governments use the IMF to push through policies that protect elite constituencies.

• This partial reform is not good for economic growth and exacerbates income inequality.

Why is there a debate?

• The “compliance question” has not been answered!

• Why not?

• The IMF (still) lacks transparency!

Reform of the IMF:• Transparency – we need to know what are the conditions

and the standards for compliance.– Letters of Intent available at www.imf.org – Executive Board?

• Ownership – governments must be committed to reform.

• Back to the mandate?

• Governance – More recipient-country representation on the Executive Board.– Reformed in March 2008, but a far cry from what’s needed…

• Top 5 members:– United States (16.8%)

– Japan (6.0%)

– Germany (5.9%)

– France (4.9%)

– UK (4.9%)

• Other important members:– China (3.7%)– Saudi Arabia (3.2%)– Russia (2.7%)– Italy? (3.2%)– Belgium? (2.1%)– Brazil? (1.4%)– India? (1.9%)– Korea (1.3%)– South Africa? (0.9%)

Korea and IMF governance• http://www.imf.org/external/np/sec/memdir/eds.htm

• http://www.imf.org/external/np/sec/memdir/members.htm

• http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

• http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

IMF web page…http://www.imf.org/external/np/sec/memdir/eds.htm

Governance

• How will this address the political manipulation of the IMF?

• It won’t.“It is the correct thing to do, but probably

won’t make much difference.”[personal conversation with Pres. Henrique Cardoso,

Brazil & Pres. Ernesto Zedillo, Mexico]

In the meantime:• Many emerging market countries are “done” with the IMF

(e.g., South Africa)

• Lending is down… so revenue for the IMF is also down!

• The IMF is tightening its belt.

• So what is their reply?• Surveillance is usually considered by the IMF to be its

“most central and important activity” (Hacche 2007, p. 98).• The IMF is like a moving target (the MTS)

Is IMF forecasting unbiased?

• No.

• Before elections, they forecast inflation that is upwards biased.

• But if you are a friend of the United States, before elections, they forecast inflation that is downwards biased!

Recent history

• Back to the old playbook?– Iceland, Hungary?

• The stigma of conditionality– Flexible Credit Line

IMF Arrangementshttp://www.imf.org/external/np/exr/map/lending/index.htm

• Iceland• Turkey• Seychelles• Pakistan• Georgia• Mongolia

Conclusion (from 2007 )• The IMF is like a credit union.• To deal with moral hazard, it attaches policy conditions to its loans.• The policies have not been working out so well, but there is no

consensus as to why.• International politics and domestic politics are likely culprits.• These days, emerging market countries are not taking loans from the

IMF as much as before.• So the IMF is shifting focus (AGAIN) – now pushing surveillance as its

new raison d’etre.• The same political problems that plague its lending practices may

plague its forecasting.• Reform to insulate the IMF from politics is necessary, but probably not

going to happen.• Will the IMF become obsolete?• Another financial crisis could give it a new job, but if the job is too big,

the IMF may become irrelevant.