The IMF Part 3:

Why do we STILL have an IMF?

Why do governments enter into IMF programs and with what

effects?

Vreeland, James Raymond. 2007. The International Monetary Fund: Politics of

Conditional Lending. New York: Routledge. HG3881.5.I58 V743 2007. CHAPTER 4

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Plan1. Who controls the IMF?

2. Which countries have participated in IMF programs?

3. What are the effects on economic growth?

4. Why do governments enter into IMF programs?

5. Interaction of international and domestic politics

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How are decisions made?Or: Who controls the IMF?

Top 5 members:

16.75%

6.23%

5.81%

4.29%

4.29%

(% of total votes)

Other important members:

3.81%

2.8%

2.39%

1.93% ???

2.67% ??

1.79% ??!!??

2.44% ?

1.41% ? 3

New vote-shares (for 2012)??Has not happened yet!

1. United States: 16.48

2. Japan: 6.14

3. China: 6.07

4. Germany: 5.31

5. France: 4.02

6. United Kingdom: 4.02

7. Italy: 3.02

8. India: 2.63

9. Russia: 2.59

10. Brazil: 2.22

11. Canada: 2.21

12. Saudi Arabia: 2.01

13. Spain: 1.92

14. Mexico: 1.80

15. Netherlands: 1.76

16. Korea: 1.73

17. Australia: 1.33

18. Belgium: 1.30

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Which countries have entered IMF programs?

Figure 1.1: Percentage of countries participating in IMF programs

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

1946

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

Year

Per

cen

t

Western Europe, US and Japan Rest of the world5

Why did the West stop using the IMF?

• Bretton Woods fixed XR system constraining– IMF loan: Softens the blow of adjustment– Conditionality: Still enforces adjustment– Impinges on NATIONAL SOVEREIGNTY

• Eventually, the West abandoned fixed exchange rates!

• But wait… http://www.imf.org/external/np/exr/map/lending/index.htm

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What does the Euro have in common with the IMF?

?They both represent answers to the quest for the elusive ideal balance between stability in international transactions and domestic autonomy

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What is an IMF program?

Why would you want to avoid it?

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La loi

• LETTER OF INTENT

• Drafted (by whom?)… signed by finance minister, central bank president, and/or chief executive.

• Sent to the Executive Board for approval

• 1st “tranche” of loan released.9

Policy conditions usually entail:• Fiscal austerity

– cutting government services and increasing taxes

• Tight monetary policy– raising interest rates and reducing credit creation

• Sometimes: Currency devaluation

• What are the goals of IMF programs?

– Economic stability

– Economic growth10

• IMF: originally intended to promote international economic stability

• But from 1970s to early 2000s:

– increasingly concerned with promoting growth and addressing poverty…

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Recidivism was the norm Extreme examples from around the world:

• South Korea spent 13 years under consecutive agreements from 1965 to 1977.

• Zaire 14 years straight (1976-1989).

• Liberia 15 years (1963-1977).

• Peru participated in consecutive agreements from 1954 to 1971 (18 years).

• Panama from 1968 to 1987 (20 years of consecutive agreements)

• After a stint of seven years (1961 to 1967), Haiti entered into agreements again from 1970 to 1989, for a total of 27 out of 29 years.

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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, 1990

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What are the effects?HERE COMES THE BAD NEWS

• Lower economic growth.

• Growing consensus across the political spectrum.

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The debate

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The left

• Bad policy advice

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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

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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.

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The problem may be one of POLITICAL ECONOMY

• What role do politics play in international organizations?

1. Domestic politics– Governments use the IMF as a scapegoat to

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

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

conditionality

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• 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)

Domestic politics

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How can an IMF program help push through unpopular

policies?

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• 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.

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• 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.”

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Government’s Chief Executive

(eg, Prez, PM, etc.)

Without the IMF

With the IMF

Veto player

(eg, Congress)

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

(eg, Congress)

Accept

Reject

-1 (change policy) + loan

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

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

– ((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.))

• What is a “veto player”? (Discuss)

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The story also requires:A commitment that is

CREDIBLE!!!!!

26SPOILER ALERT!

Compliance

• The IMF can be used as leverage iff conditionality is enforced.

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

• Why?– International politics– Bureaucratic politics

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The International Relations Problem:

• Veto players story requires a credible commitment

• The IMF must punish noncompliance.

• We have seen from the IR literature that this commitment is not always credible.

• So the effect of veto players should depend on country-US relations.

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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.

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Putting the domestic and international stories together…

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Favorable US interest in the country

Eff

ect

of

do

me

stic

ins

titu

tio

ns

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

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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

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The IMF effect:• 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 (domestic politics)

• Consensus that IMF programs historically did not help economic development 33

Why is there a debate?

1. The “compliance question” has not been answered!

– Why not?

– The IMF (still) lacks transparency!

2. Perhaps all of the stories are correct

– There is evidence in favor of each

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Lending to 4 types of countries:

1. Government uses IMF leverage to push through “reforms” that protect elites, leaving labor & the poor to pay for “adjustment” (common)

2. Government has international leverage, and conditionality is not binding (relatively common – Pakistan, Russia)

3. IMF imposes the wrong conditions (1997 East Asian Crisis)

4. IMF imposes the right conditions on a government with the political will to see them through (uncommon – 1995 Mexico)

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So my view is nuanced:

• The average effect of IMF programs on growth: negative

• Now, sometimes IMF gives good advice & good implementation lead to good outcomes

• Sometimes policy conditions are completely ignored

• Sometimes the IMF gives bad advice

• Sometimes governments pursue “partial reform”

Maybe we need something new?

• http://www.brookings.edu/experts/desair.aspx

• http://www.hurriyetdailynews.com/default.aspx?pageid=438&n=does-the-eurozone-need-its-own-monetary-fund-2010-04-13

• Regional solutions?

• We’ll get back to this…

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Key substantive points from today:

• IMF policy conditions usually include:

– Fiscal austerity

– Tight monetary policy

• Why do IMF programs lower economic growth?

– The Left: Wrong policy CONDITIONS

– The Right: Conditions ignored - LOANS subsidize bad policy

– Moderate: Domestic & international POLITICS alter the deal

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Key analytical concepts

• Veto Player

• Credible Commitment

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Thank youWE ARE GLOBAL GEORGETOWN!

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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 emerging-market representation on the Executive Board.

– Reformed in 2008, 2012 but still does not reflect economic realties…

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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]

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

(e.g., South Africa)

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

• Until the new crisis…

• The IMF is now returning to its roots:

– Bailing out Western European countries facing economic crisis, unable to devalue because of a fixed exchange rate

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Recent history

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

• The stigma of conditionality– Flexible Credit Line

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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.

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