CAN NATIONAL EXECUTIVES USE IMF
CONDITIONALITY AS LEVERAGE FOR DOMESTIC
BARGAINING?
Argentinean National Executive and provincial
negotiations for the IMF’s Financial Shield in
November 2000
Andres Tacsir‡
1.
INTRODUCTION
During the first week of January 2001, Buenos Aires was covered with the
government’s new propaganda slogan: ‘Risk free. Argentina is growing’. After
several months of bargaining, the Argentinean government finally achieved the
Financial Shield (FS), an agreement with the International Monetary Found
(IMF) which would guarantee Argentina’s financing needs for the entire year.
With sovereign bond spreads greater than 10% and the economy in its second
year of recession, the IMF’s offer of US$ 16.3 billon and consequent funding
from different sources (such as the World Bank, the Spanish government and
the Argentinean private bank sector) of US$ 39.7 billon gave the Argentinean
authorities some respite and the hope that the economy would grow again.
The Argentinean National Executive Power (NEP) required several
months to convince the rest of the political actors to commit themselves to
the measures demanded by the IMF. President Fernando De la Rúa and his
cabinet had to implement four demands in order to gain the IMF approval
that would trigger the remainder of the assistance: a reduction in provincial
spending, the approval of the national budget, reform of the social security
scheme, and modification of the health system that was run by trade unions.
The bargaining concerning the National Budget Law and the reforms of both
the social security and health systems required the approval of the National
M.Sc. candidate, School of Public Policy, University College London (expected
November 2005).
INTERNATIONAL PUBLIC POLICY REVIEW, vol. I, no. 1 (September 2005): 133-133. [ISSN 1748-5207]
‡
© 2005 by The School of Public Policy, University College London, London, United Kingdom. All rights reserved.
133
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Congress (NC). By contrast, the cuts in the provincial budgets and the
replacement of the Federal Tax Sharing Mechanism (FTSM) by a new system,
known as Compromiso Federal 2000 (CF2000), involved the head of the
executive in each province.
Although negotiations between the NEP and the provincial governors
lasted only nine days during November 2000, the CF2000 was an important
first step in achieving the IMF conditions that required the full political
resources of the national government. In this essay I analyze the strategy that
the NEP pursued for the signing of the CF2000 in order to obtain IMF
support. As the literature of two-level games postulates, I consider that the
domestic and international levels are linked during international negotiations.
In this sense, my main goal is to analyze whether the NEP used IMF
conditionality as leverage to negotiate with the Provincial Executive Powers
(PEPs). Even though the NEP was urged to secure IMF financial assistance in
order to continue with the Convertibility Plan (CP)1, IMF conditions enabled
the national negotiators to obtain a PEP commitment that was otherwise
unattainable. After the resignation of the vice-president and a near rupture of
the coalition in the government, the NEP needed to restructure its power; in
that situation, the IMF was used as an ally to deal with one of the most
difficult tasks faced by the government: its relationship with the PEPs.
This paper is divided into five sections. In Section II, I describe some of
the main institutional characteristics of the Argentinean political game in order
to understand the importance of the negotiations between the NEP and the
PEPs. In Section III, I turn to my case study and analyse the negotiations
between the NEP and PEPs during November 2002. In Section IV, some brief
conclusions are made. Annex 1 provides an explanation using the rational
choice model of the dynamics of the bargaining between the NEP and the
PEPs concerning the CF2000.
2.
THE INITIAL SITUATION IN THE ARGENTINEAN CASE: GENERAL OVERVIEW
AND INSTITUTIONAL FRAMEWORK
After 10 years of Menem’s Peronist Party (PJ) presidency, UCR’s De la
Rúa led the Alianza coalition that took office in December 19992. Álvarez,
1
The Convertibility plan was a stabilisation programme adopted in 1991. The value of the
domestic currency, peso, was linked to the US dollar with the guarantee that pesos could be
exchanged for dollars at will. The BCRA (Central Bank) was given independence from the NEP
and received the mandate to maintain the value of the peso by holding dollar reserves against its
domestic liabilities. For more details see Mussa (2002). For the evolution of the Convertibility
and its difficulties see Galiani et al (2003).
2
Menem won the presidential elections of 1989 with 45% of the vote. Since that moment
the Peronist party won all the national legislative elections (1991, 1993 and 1995) until the
Alianza was formed. In 1994 President Menem and former President and leader of the UCR,
Alfonsín, signed the Pacto de Olivos (Olivos Agreement) in order to reform the National
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FREPASO’s leader, was elected as vice-president3. Because of the ideological
differences between both parties and as a consequence of their de-facto
alliance for several years in the House of Representatives, the Alianza was
always seen as an electoral coalition incapable of being a governmental
coalition4.
In fact, deep differences between De la Rúa and Álvarez concerning
corruption in the Senate House provoked Álvarez’s resignation in October
20005; after which the stability of Alianza became even more fragile6. Within
weeks, De la Rúa lost political capital as a consequence of several changes in
his cabinet and the loss of important support in the House from legislators
loyal to Álvarez7. Moreover, doubts about De la Rúa’s government without
Álvarez’s support dramatically increased the already high price of access to the
international financial markets (Figure 1).
From the beginning of the Alianza administration, the coalition had to
deal with the same problems that Menem had suffered from during his second
presidency (1995-99) both in the economic and political spheres. On the
political front, there were two main constraints: the struggle to hold stable
majorities in the NC that became even more intense after Alvarez’s
resignation; and the structural tension between the NEP and the PEPs due to
the absence of a definitive agreement governing the relationship among the
different levels of government8, a situation that was exacerbated because the
Constitution allowing Menem to run for re-election. In the presidential election of 1995,
Menem obtained 47.7% of the votes, the newly formed FREPASO obtained 28.2% and the UCR
16.4%. For a detailed description of the tendencies of Argentinean national elections since 1983
see Torre (2003), for the main data concerning the elections since 1983 see Ministerio del
Interior de la República Argentina, Presidencia de la Nación Argentina at
http://www.mininterior.gov.ar/elecciones/estadistica/estadistica.asp, for a general description
of the party system of Argentina between 1983 and 2003 see Malamud and De Luca (2005).
3
The Alianza was mainly formed by the leaders from UCR and FREPASO: from UCR
former President Raúl Alfonsín, Major of Buenos Aires, Fernando De la Rúa and legislator
Rodolfo Terragno were the main figures; main figures from FREPASO were legislators Carlos
Álvarez and Graciela Fernández Meijide. This group was known in Argentina as Grupo de los
Cinco (Group of Five). For an account of the formation, evolution and inherent problems of the
Alianza coalition see Novaro (2001).
4
Novaro (2001), p. 85
5
The New York Times (2000)
6
The Economist (2000b) and (2001)
7
After the elections of October 1999, the Alianza was the largest minority in the House of
257 seats with 124 legislators, the PJ had 99, provincial parties 22 and Acción por la República
had 12; After the resignation of Álvarez in October 2000 the UCR legislators numbered just 81.
At that moment FREPASO’s legislators explicitly conditioned their support for the De la Rúa
government. See La Nación (1999e) and La Nación (2000d).
8
Between 1984 and 1987, the financial relationship between the NEP and the PEPs was in
a legal void and it was characterized by continuous bargaining between the counterparts leading
to a high discretionary scheme for the distribution of national resources. In 1988 the Alfonsín
Administration designed a transitory FTSM. Despite the many changes introduced since 1988 in
the tax structure, the essence of FTSM remained the same throughout the 1990s. During the
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Figure 1. (Source: Elaboration by the author)
Alianza only won governor elections in a few provinces9. In the economic
realm, during 2000 the De la Rúa Administration faced the consequences of a
two year long recession10. Moreover, his electoral commitment to the CP and
the weak fiscal situation of the NEP reduced the new government’s
manoeuvres.
Menem Administration two main changes were introduced which remained in essence until the
CF2000: a) “pre-coparticipation” – the redirection of parts of the taxes originally destined to the
coparticipation scheme towards other purposes – was introduced and b) a fixed-sum transfer
and a minimum transfer to the PEPs were guaranteed by the NEP. The need for coordinating
the efforts at the federal and the provincial levels in order achieve the fiscal and macroeconomic
stability desired by the Menem Administration lead the NEP to design the FPI and FPII in the
early 1990s. The Tax reform of 1998 introduced a new deduction of the coparticipated
revenues. In 1999 the De la Rúa Administration signed the first Compromiso Federal freezing the
transfers from the NEP to the PEPs for one year. For more details see Cetrángolo and Jiménez
(1998) and Scwartz and Liuskila (1997).
9
During the presidency of De la Rúa, the Alianza or the UCR controlled 8 out of 24
electoral districts: Ciudad de Buenos Aires, Catamarca, Chaco, Chubut, Entre Rios, Mendoza,
Rio Negro and San Juan. The province of Corrientes had a federal intervention and thus was
under the control of the NEP – under certain circumstances in Argentina the NEP can remove
the provincial authorities and appoint a federal authority. In 2000 the provinces controlled by
the NEP represented only 30 % of the total transfers from the NEP to the PEPs and
accumulated 35% of the total PEP’s debt.
10
Among the main problems faced by the De la Rúa Administration were: high volatility
of international investment, weak performance of exports, deep economic recession, high
unemployment, deficit management and an impressive governmental debt. For a description of
the Argentinean economy at the end of the 1990’s see Ministerio de Economía de la República
Argentina, MECON (several numbers)
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The PEPs’ fiscal performance showed different phases during the 1990s
as result of both the changes associated with the relationship between the
NEP and the PEP and national macroeconomic performance (Figure 2). Due to
the launch of the stabilisation programme of 1991 and the fast economic
recovery, the PEPs showed a significant growth in tax revenues leading to a
recovery in provincial finances until the financial crisis of 1995. The PEPs
suffered acutely during the Tequila crisis: it was not only an important decline
in tax revenue but also many provinces had to rescue their own provincial
banks and legal limits to control expenditures were introduced in several
provinces. When the economy recovered momentum in 1997, the PEPs
showed the lowest deficits of the decade. However, the fiscal imbalance grew
at the end of the decade mainly due to two factors: the poor revenues of the
provinces and the expansionary expenditure policies11.
Figure 2. PEP’s global and primary result as percentage of the GDP
(Source: Author’s own elaboration on MECON)
The fiscal deficit of the provinces was financed in different ways
throughout the decade. The CP and the reform of the BCRA Charter of
1992 imposed important constraints on the fiscal deficit financing
limiting the capacity to borrow from official banks, a tendency that was
exacerbated with the privatisation of many provincial banks after the
Tequila crisis. These restrictions were counterbalanced by the
favourable financial context of the early 1990s and the provinces had
good access to the private markets until the 1995 crisis. After the
Tequila crisis the borrowing conditions for the provinces changed,
11
The data concerning the results for each province for the period 1991-2000 can be found
in Annex 2
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requiring a more active participation of the NEP. Stock of provincial
debt accelerated at the end of the 1990s, the ratio debt stock/GDP
growing from 4.6% in 1997 to 6.7% in 1999.
There are two main characteristics of the relationship between the NEP
and the PEPS that are useful to introduce the framework upon which the
bargaining of the CF2000 was based. Firstly, general and intra-party electoral
rules in Argentina12 transfer power away from the NC and the national parties
in favour of provincial leaders or governors. The provincial leaders are key
players in the nomination process of the legislative candidates, with the
national party leadership and rank-and-file members playing a secondary role.
Therefore, national legislators owe allegiance to the provincial party leader.
Politics are done at the level of provincial party leaders; during informal
assemblies of governors, with each of them controlling a substantial number of
legislators, each governor may actually act as a veto player and increase their
power vis-à-vis the executive13.
Secondly, PEPs undertake a large portion of total spending and a small
fraction of taxation in the Argentinean federal fiscal game. So the provincial
leaders get a large share of the political benefit from spending and a small
fraction of the political cost from taxation. Moreover, the central government
usually bails out provinces with fiscal problems in a context of FTSM rigidities
and loopholes that provide poor incentives for fiscal responsibility. The
provinces’ dependency creates incentives for opportunistic manipulation from
the NEP; to avoid discretionary allocation of resources, political actors have
attempted to increase the rigidity of the FTSM14,15.
3. CASE STUDY: NEGOTIATIONS BETWEEN THE NEP AND PEPS FOR
PROVINCIAL DEFICIT REDUCTION IN NOVEMBER 2000
3.1. The initial movements
12
Argentina is a federal republic with a presidential form of government and a bicameral
legislature. Argentina has 24 electoral districts (23 provinces and a federal capital) which have
their own elected head of government, the governor. According to the National Constitution,
the PEPs hold all the powers that they have not delegated to the NEP.
13
Spiller and Tommasi (2003), p. 292.
14
Ibid, p. 296.
15
According to the National Constitution reformed in 1994, a new “definitive” FTSM
should have been approved before the end of 1996. Nevertheless, there was no revision of the
FTSM made at all during the 1990s and consequently all the arrangements established to rule
the FTSM since 1997 had a “transitory” character. Between the reform of the ANC and the end
of 1999, several proposals to reform the FTSM were made by Remes Lenicov in 1997, López
Murphy in 1998, the Menem Administration itself and Ortega, both during 1999. For more
details of these proposals and the difficulties of reaching a “definitive” agreement on the FTSM
see Cuevas (2003),
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The De la Rúa Administration had among its main objectives the
reduction of the budget deficit. From the first moment he was elected
president16, De la Rúa showed a clear interest in the reduction of both the
national deficit and the provincial budgets17. This signal was internationally
welcomed, generating the public support of top bureaucrats in international
organisations as well18.
In November 2000, once the government disclosed that negotiations with
the IMF for an extraordinary assistance package were on the table, De la Rúa
personally started negotiations with the PJ. Before important details of the
NEP plan associated with the FS conditionality were known, PJ’s legislators
and governors informally expressed their support to the NEP in order to
strengthen the government’s position vis-à-vis the IMF19. In the first round of
negotiations, the NEP announced its position to the PEPs: a freezing of both
the transferences from the NEP to the PEPs and of PEPs spending for 5 years
until 2005.
The PEPs rejected the NEP’s offer. Showing that both the acceptable
spending and transfer minimums were much higher than those offered by the
NEP’s, the PEPs made a new proposal: control of employment and food
assistance programmes managed by the NEP, the creation of an
unemployment insurance, a new educational programme, a new infrastructure
investment plan, an agreement for provincial debt repayment, and a new
national budget law. When the heads of the PEPs, such as Ruckauf, De la Sota
and Kirchner20, made their suggestions, trying to raise the sovereignty cost of
the NEP, they pointed out that the NEP needed to undertake measures in
response to the social problems of their provinces21.
According to the model developed in the annex, the NEP’s ideal point was
in segment [A]. In such a situation the best outcome the NEP could obtain
The formula De la Rúa-Álvarez won the presidencial election on 26, November, 1999.
La Nación (1999a), La Nación (1999b) and La Nación (1999c). Moreover, the
appointment of several economists in his first cabinet was seen as a clear signal of the
commitment of the government to fiscal discipline. See The Economist (1999a)
18
See La Nación (1999d) and The Economist (2000a). After his trip to Argentina in May
2000, IMF Managing Director Mr. Köhler was asked in a press conference about the
Argentinean need to reduce the deficit. He answered that he was “quite impressed that the
President of Argentina strongly told me that it is his government’s program and not an
imposition of the IMF. So I took note of that and of course I was pleased with that because it is
my own understanding. And I will look how it is implemented, that whatever we do, from here,
from the IMF, the ownership of programs and reforms is very, very important. That there is
ownership is more important than a short-term effect of maybe a number, a specific number, in
a program of the IMF”. See IMF (2000)
19
Clarin (2000)
20
Ruckauf was the governor of Buenos Aires, De la Sota of Córdoba and Kirchenr of Santa
Cruz.
21
For the declarations of Kirchner see La Nación (2000a), for declarations of De la Sota see
La Nación (2000b) and for Ruckauf’s see La Nación (2000c)
16
17
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was the minimum value of deficit accepted by the PEPs. The ideal deficit of
the NEP was much lower than the minimum value of deficit tolerable by the
PEPs. At the same time, in such a situation, the deficit demanded by the IMF
was higher than the one demanded by the NEP. Moreover, in the particular
situation of the bargaining for the CF2000 the NEP knew that a higher
reduction in the deficit would be achievable if some patterns of the bargaining
were changed. In order to do that, the NEP needed to change some of the
most relevant sets of information available for the PEPs.
3.2. The final agreement
After each of the proposals was rejected by the other party, the situation
arrived at a deadlock. How could the NEP rapidly overcome the impasse in
order to obtain the financial support of the IMF and achieve a higher
provincial deficit reduction than the one demanded by the IMF? To achieve
an agreement that fulfilled its expectations, the NEP had few alternatives: to
increase the value of the general rejection cost, to increase the value of the
particular rejection cost of the PEPs, or to change its ideal point. The adoption
of the last option meant that the NEP would not use the IMF as leverage for
bargaining. Since the negotiations with the IMF were already public, the
strategy of increasing both costs was adopted by the NEP.
In order to be able to blame the PEP leaders for rejecting IMF
conditionality, the NEP started to stress the high cost that a non-agreement
would have for both the national economy and the provincial economies22.
When the De la Rúa Administration made its first move, the economic
situation of Argentina was dramatically worse than the year before he took
office. The combination of internal and external shocks produced an increase
to the interest rate that the government had to pay in order to access the
international financial markets. This consequently started to generate doubts
about Argentina’s capability to service the debt23. The high level of the PEP
debts and the need to get financial resources forced the PEPs to attempt to
avoid the closures of any international financial source, and this was used by
After one of the bargaining rounds concerning the viability of the PEPs’ plan, Colombo,
the Cabinet Chief, said that “the (PEPs’) proposal is inadmissible economically and politically.
We are responsible enough to not accept a proposal that would increase the expenditure up to
the point that the economic plan and the Argentinean economy will explode”. Concerning the
eventual cost for the provinces, Colombo stated that “if an agreement is not reached, it is going
to be very harmful, even for some Peronist provinces with high debt burden”. See La Nación
(2000a)
23
The Economist (2000c). According to Vreeland (2003) the cost of rejecting the IMF, (r
in the model in annex 1), is that it sends negative signals to creditors and investors. A country
particularly sensitive to the decisions of creditors and investors has a high r. Therefore,
Argentina during the negotiation had a very high rejection cost.
22
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the NEP as another tool in the negotiations24. When signing the CF2000 with
their allied governors, the PEPs also pressed the PJ heads of provinces.
Moreover, with the next election close, the PJ governors did not want to bear
the burden of the domestic political costs of rejection25.
During the negotiations, the links between international and domestic
actors played a very important role. The American, Spanish and Italian
governments publicly stated that their countries would support the
international assistance package. The IMF announced in several instances that
its bargaining groups were ready to go to Buenos Aires and it was just waiting
for an agreement between the PEPs and the NEP26. Both strategies could be
read as attempts to show that the PEPs were to blame for any failure in
negotiations. Moreover, according to some versions, the bureaucrats of
international organisations participating in the bargaining emphasised the high
risk that their provinces would bear if the agreement was not achieved to
influential governors such as De la Sota and Ruckauf27.
Finally, after nine days of bargaining, the CF2000 was signed by the NEP
and the PJ governors. The final document stated that the NEP’s and PEP’s
budget was frozen until 2005 and spending increases could only be made in an
emergency context in the education, health and security realms. Essentially,
the new CF2000, replacing the one signed in December 1999, froze monthly
NEP transferences to the PEPs at $ 1,364 million for 2001 and 2002 (the same
level as 2000) and forced the NEP to transfer entirely the amount for Social
Programmes in 2001 ($225 million) and only 30% of that total between 2002
and 200528.
4. CONCLUSIONS
In this essay I have described the negotiations between the NEP and the
PEPs in the context of bargaining between the Argentinean NEP and the IMF.
We have tried to demonstrate how the presence of the IMF gave the NEP
important leverage in bargaining. At the end of the negotiations, the agreement
was celebrated by the NEP while the PEPs pointed to the great effort made to
sign it. Nevertheless it is very hard to know whether the level of provincial
spending finally agreed was consistent with the NEP’s ideal point.
24
Colombo again said that “ the majority of the provinces, and the nation, need to roll-over
because they have a stock debt and need international financial assistance”, La Nación (2000e)
25
The electoral horizon was not restricted to the legislative elections of 2001 but also to
the presidential one of 2003. The governors of the three more important provinces controlled
by the PJ (Buenos Aires, Córdoba and Santa Fé) were participating in competition within the PJ
to become the Peronist candidate. In that context, these governors tried to avoid blame for any
political costs that the country might bear.
26
La Nación (2000f)
27
La Nación (2000g) and La Nación (2000h)
28
A detailed explanation of the CF2000 can be found in World Bank (2001)
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To know if the first proposal of the NEP was the product of its ideal point
or was just a bargaining strategy is a topic that requires more research. At the
same time it is very important to decipher whether the provincial deficit
objective of the NEP was more rigorous than the IMF’s objective. Moreover,
the role that the IMF played in the negotiation also requires further analysis
since at the end of the day, the success or failure of Argentinean politics are
inextricably linked to these kinds of external negotiations.
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APPENDIX 1
The model: the logic of using IMF conditionality as leverage in bargaining
Any international negotiation can be conceived as a two-level game as in
Putnam’s seminal essay Diplomacy and domestic politics: the logic of two-level
games29. An important literature containing both theoretical and case study
analyses has appeared supporting or challenging Putnam findings30. Among the
most recent and interesting works on this topic, Vreeland’s (2003) approach
on negotiations between IMF and developing countries for financial assistance
is useful for understanding my case study. Vreeland states that a pro-reform
executive of a developing country may introduce the IMF into the national
bargaining in order to achieve reforms that are seen as otherwise politically
impossible. By entering into an IMF agreement, an executive ties its preferred
policies of economic reform to the conditions of the IMF. For opponents of
economic reform, this move raises the rejection cost of the executive’s
proposal because a refusal is no longer the mere rejection of the executive’s
proposal but also of the IMF’s. A total rejection of the IMF not only limits the
credit that the IMF will extend to the country but it also sends out costly
negative signals to creditors and investors.
To explain how the NEP used the IMF conditionality during the
negotiations for the assistance package that attempted to reduce PEPs’
spending in November 2000, I will adapt Vreeland’s model. Consider a game
involving three actors: the NEP, and the veto players consisting of the PEPs
and the IMF. The agreement between the NEP and the IMF is negotiated over
one dimension: the provincial budget deficit, d, that can be expressed by the
interval [0; 1]. At the beginning of the game, the status quo (SQ) implies that
d=1. Each of the actors has an ideal deficit point di, the ideal deficit of PEPs31 is
1, the IMF’s ideal is 0 and the ideal point of NEP is somewhere in the interval
[0; 1]. The ideal point of IMF and PEPs are publicly known; however, NEP’s
Putnam’s main idea is that during international negotiations each national leader sits
simultaneously in two boards that interact: at the international board, the national
representative sits amongst his foreign counterparts while at the domestic board he shares the
table with his constituency, such as party and parliamentary figures, spokespeople from
domestic agencies, or key interests groups. The main goal of the international negotiator is to
make moves that are rational simultaneously on both boards, despite the fact that some moves
that are rational for the national leader on one of the boards are impolitic for him in the other
one.
30
See Milner, H. and Rosendorff, P. (1997), Mo (1994), Mo (1995) and Mayer (1992).
31
During the essay I consider the PEPs as a unitary actor, which requires additional
qualifications. First, it is logical to exclude from the PEPs the provincial leaders that are of the
same party as the NEP. Second, among the PEPs governed by opposition parties, several
differences exist on the ideal point. We can suppose that the veto player with the most distant
ideal deficit reduction from the NEP ‘absorbs’ the other veto players. See Tsebelis (2002),
especially Chapter 1.
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ideal point is private information. In short, PEPs want to keep the provincial
deficit at the SQ level, the IMF wants to eliminate it, and the NEP wants a
new level between the two.
Figure A1 – The structure of the game
Situation 1
Accept
PEP
Reject
Proceed
NEP
Approach
Situation 2
Stop
NEP
Situation 3
Not Approach
Situation 4
Source: Author’s own elaboration on Vreeland (2003)
What are the dynamics of this game? The NEP makes the first move: it
chooses to approach or not approach the IMF for the negotiation of an
agreement. If the NEP chooses not to approach, it accepts the SQ (Situation 4
in Figure A1). If the NEP approaches the IMF, it must pay the sovereignty
cost, s, and the IMF reveals its position of the maximum acceptable level of
deficit, n. After observing n, the NEP can ‘proceed’ with the negotiations or
‘stop’. If the NEP stops, the deficit remains at SQ and the game ends (Situation
3). If the NEP ‘proceeds’, it must, with the IMF, stipulate a level of provincial
deficit, a. The IMF only agrees the values of a lower than or equal to n. The
higher the value of n, the wider the range of acceptable a values becomes. The
NEP announces publicly the value of a, that was agreed with the IMF. The
PEP may ‘accept’ or ‘reject’ the agreement. If the PEP ‘accepts’ the agreement,
the new deficit is a (Situation 1). If the PEP rejects the agreement (Situation
2), both the PEP and NEP will send a strong negative signal to the markets: the
country has not the political will to undergo economic reforms. Thus, by
choosing to reject, the deficit remains at SQ and both PEP and NEP bear the
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general cost of rejection r plus the particular rejection cost for each of the
national actors, rp (for the PEPs) and re (for the NEP)32.
Table A1- Payoff of the game
Players Payoffs
Situation
Outcome
PEP
NEP
IMF
1
s, d = a
- │1 – a │
- │ a -dG │-s
-a- (1-n)
s, r, rp, re, d =1
- r-rp
- │ 1 -dG │-s -r-re
-1
0
- │ 1 -dG │-s
-1
0
- │ 1 -dG │-s
-1
2
s, d = 1
3
4
d=1
Source: Author’s elaboration on Vreeland (2003)
The utility of each agent can be expressed as the negative distance from
the actor’s ideal point. Each situation produces a particular outcome and has a
different payoff for each player (Table A1). Given the different payoffs, it is
possible to find equilibrium. Using backward induction, I can see that the PEP
will accept the agreement in the last node of the decision tree if the cost of
rejection is higher than the acceptance cost. We can see that the PEP has a
minimum acceptable deficit (1-r-rp), m. For any agreement value of deficit less
than m, the PEPs would be better off rejecting the agreement and paying r
rather than accepting. The PEPs will accept an agreement if a  1 – (r+rp). If
the cost of rejecting is 0, the PEP will only accept an agreement that maintains
the deficit of SQ; at the highest possible cost of rejection, the PEP will accept
any agreement. Concerning the second node, since the NEP faces r + re if the
PEP rejects the agreement, the NEP prefers outcome 2 rather than outcome 3.
Even though in Vreeland’s model the only rejection cost is r, I consider that in this kind
of situation, one of the most relevant elements is the different political costs that each actor has
to bear.
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Because the NEP knows the values of m and n, it will only proceed if n ≥ a ≥
m.
The conditions for an agreement can be explained as a function of the
interrelated preferences of the three actors (Figure A2). First, I must specify
the “acceptable set” for both the PEPs and the IMF. Since n is the maximum
deficit that IMF will accept and m is the minimum deficit that PEP will
tolerate, the agreement only can be reached if m < n. If the NEP observes that
m > n, the NEP will stop negotiations; as a result the deficit will be equal to
the SQ and the NEP will pay the cost s (Situation 3). Second, I have to
consider the different outcomes in function of the ideal point of the NEP. The
NEP’s ideal deficit, dNEP, can be located in any of the four segments of the
interval [0; 1]. If dNEP is located in segment A, then the best value of deficit in
the “acceptable set” for the NEP is m. In this situation the NEP is austere and
will negotiate for the minimum possible deficit, even beyond the IMF’s
demands. If the dNEP is located in the segment B, the NEP can negotiate for a =
dNEP that sets the agreement deficit in its ideal point. In this situation, the NEP
goes beyond what the IMF demands but stops before m. If dNEP is in the
segment C, the NEP cannot do better than propose an agreement with a = n.
If dNEP is in the segment D, IMF’s demands are too hard and an agreement can
not be achieved, since the NEP prefers the SQ rather than an agreement with
a = n. In brief, an agreement will only be made if m ≥ a and dNEP ≤ (n+1)/2.
Fulfilling these conditions, the value of a in the agreement will be between
the maximum value of m and the minimum between dNEP and n.
Governments often claim that the IMF austerity goes beyond their
preferences, that is, n < dNEP. Nevertheless, since the PEPs are only able to
observe a, they do not know if a reflects the maximum deficit acceptable to
the IMF, n, or the NEP’s ideal point, dNEP.
Figure A2- The conditions for an agreement
A
0
B
m
C
n
D
(n+1)/2
Source: Author’s Own elaboration on Vreeland (2003)
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APPENDIX 2: Argentinean Provinces: Global Result (in $ thousands)
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