• 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.”
How does bringing in the IMF help
push through economic reform?
Figure 1: The logic of bringing in the IMF
Executive
How does bringing in the IMF help
push through economic reform?
Figure 1: The logic of bringing in the IMF
Payoff to veto player
Accept
-1 (change policy)
Veto
player
Without
the IMF
Executive
Reject
0 (maintain the status quo)
How does bringing in the IMF help
push through economic reform?
Figure 1: The logic of bringing in the IMF
Payoff to veto player
Accept
-1 (change policy)
Veto
player
Without
the IMF
Reject
0 (maintain the status quo)
Executive
With the IMF
Accept
Veto
player
Reject
-1 (change policy)
+ loan
-r (reject the IMF)
• 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…
Entering into IMF Programs:
Effect of domestic institutions
The effect of domestic politics depends on international politics
Favorable US interest in the country
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 Arrangements
http://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.