Erica R. Gould - IMF

Erica R.
Gould Chapter 1e, 3-24-01
I. Introduction The International Monetary Fund (IMF or Fund) appears to be more a master of states, than a servant to them. Arguably the Funds most powerful mechanism of control over states is the conditionality arrangement, a specific kind of loan agreement by which the IMF agrees to loan a certain amount of money, often in stages, in return for the borrowing states compliance with certain conditions. According to the Congressionally-appointed United States International Financial Institutional Advisory Commission (IFIAC), the Funds increasing use of long-term conditional loans has given the IMF a degree of influence over member countries policy making that is unprecedented for a multilateral organization.1 When representatives of states established the IMF at the Bretton Woods Conference, they did not design it to wield power over states policies through this tool of conditionality. Rather, the IMF was created to maintain the par value exchange rate system and loaned resources for the narrow purpose of offsetting shortterm payments imbalances in order to defend these pegged (but adjustable) exchange rates. In 1952, the IMF first attached conditions to its loans, and since then conditional loan arrangements have become longer with more numerous and detailed conditions spanning a broader range of policy areas. This change in the Funds activities has been a subject of perennial international debate and has been criticized widely. The Fund appears to exercise power over member states, particularly borrowing member states, in a way that the founders did not intend and the current international consensus opposes.
The crucial mechanism of the Funds power over states is the conditional loan arrangement. Since its first use in 1952, both the level and form of IMF conditionality have changed dramatically. The number of conditions that a borrowing member country must meet in order to receive timely installments of an IMF loan has increased. The types of the conditions have evolved, from the broad macroeconomic targets in the 1950s and 1960s to the microconditionality today, which specifies conditions pertaining to policy implementation, for example educational and tax reforms, in great detail. The Fund now offers advice, and sets conditions, on a wider range of policies from areas of long-standing focus, like exchange rates
United States IFIAC (2000).
Erica R. Gould Chapter 1e, 3-24-01
and credit expansion, to new areas of concentration, including corruption and banking and enterprise reform. Today the Funds loans are also generally larger, longer-term, and tackle new problems, like structural issues of development rather than short-term balance of payments crises, as originally intended.
The key changes in the terms of conditional loan arrangementsthe increase in length, the increase in the number of conditions, the change in the types of conditions, the structure of the agreements and the goals of the recommended programshave long been the subject of debate and dissent, but have recently provoked a more vocal and coherent opposition. 2 Since the 1997-8 financial crises in Asia, Brazil and Russia, diverse representatives of states, non-governmental organizations, academia and the IMF itself have argued that the changes in Fund activities, particularly the increase in longer-term condit ional loan arrangements with numerous conditions, were misguided and should be reversed.3 Many argue that, in addition to being of questionable effectiveness and outside of the Funds core mandate, these changes in conditionality have deepened the Funds intrusion on the domestic sovereignty of borrowing member states and worsened the democratic deficit inherent in international level domestic policy-making. 4 For instance, President Clintons Treasury Secretary, Larry Summers, called for a return to the Funds core mandate of short-term emergency financing, rather than longer-term development lending with numerous structural conditions. The IFIAC (or Meltzer Commission), established by the
In addition to the reports mentioned here, also see Overseas Development Council (2000) and Council on Foreign Relations (1999). There have also been pressures on the Fund to return to its core mandate and areas of expertise in other activities, such as surveillance. An external evaluation of Fund surveillance commissioned by the Fund echoed this theme in relation to the Funds surveillance policies, concluding that the Funds bilateral surveillance has expanded significantlyinto structural issues of a non-financial nature and recommended that the Funds bilateral surveillance should focus as much as possible on the core issues of exchange rate policy and directly associated macroeconomic policies. International Monetary Fund (1999), 13-14. 3 This consensus continues to be opposed by a minority. For instance, Tony Killick welcomes some of these structural conditions as addressing concerns of income inequality, etc. There is a definite conflict between those who argue that the Fund should limit conditionality and protect state sovereignty and those who argue that the Fund does not pay enough attention to issues of income inequality, environmental degradation, etc. and should include such conditions in their programs. (Killick 1982). 4 The democratic deficit argument is that policymaking done at the international level often preclude citizen participation and thereby circumvents the democratic process. The term domestic sovereignty was coined by Krasner 1999. By worsening the democratic deficit, I mean that as more and more policy decisions are settled at the negotiating table for an IMF loan, the citizenry is arguably precluded from more and more policy spheres. This is open for contestation, but seems to be a plausible interpretation.
Republican U.S. Congress in 1998, unanimously recommended that the International Monetary Fund should restrict its lending to the provision of short-term liquidity, and that the current practice of extending longer-term loans for poverty reduction and other purposes should end.5 The Funds conditional loan arrangements, they argued, have not ensured economic progress and have undermined national sovereignty and often hindered the development of responsible, democratic institutions that correct their own mistakes and respond to changes in external conditions. A report written by a group of academic economists, each of whom had also spent time working at the Fund, also urged the Fund to limit the use of structural conditions which are often interfering with sovereignty.6 The Funds new Managing Director, Horst Khler has said that he intends to persuade the Funds Board to reduce the conditions it attaches to its lending. 7 Finally in response, the Funds Executive Board recently approved a plan to limit the duration of many types of loans and discourage development lending, particularly for middle -income developing countries, by increasing the interest rate on certain types of loans. 8 However, it is unclear how much this decision will actually address the criticisms discussed above. The Board decision actually preserved the Funds role as a source of longer-term development lending to lower-income countries because the limits only apply to certain categories of loans most often used by middle -income countries.
These changes in Fund activities, and partic ularly Fund conditionality, including the increase in the length of arrangements and in the number of structural conditions, have led to an increase in the Funds power over states domestic policies and political processes. These changes, especially in light of the current international consensus that they were misguided, beg the question: What explains these changes in the Funds activities, in the Funds interactions with its member states and in the terms of Fund conditionality programs? How did the Fund move
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United States IFIAC (2000). De Gregorio, et. al. (1999), 77. 7 Kahn (2000), B1. His plan for overall Fund reform will be presented at the upcoming Annual Meeting in Prague, September 2000. 8 Kahn (2000) , B1; International Monetary Fund (9-18-2000) . While the full details of the Board agreement has not yet been released, it is clear that its decision preserves the Funds ability to make longerterm developmental loans in many cases. The limits on loan duration and increases in interest rates only apply to stand-by and EFF arrangements, not PRGF arrangements which are more often used by low-
from being circumscribed in its activities and interactions with states to being a powerful player accused regularly of dictating policies, altering domestic political debates and violating state sovereignty?
The most obvious explanation of Fund activity change is that the United States controls the IMF, wanted these changes in Fund conditionality and that borrowing countries accepted the terms out of deference for (or fear of) the U.S. The U.S. does have the largest share of voting power in the Funds two governing bodies, the Executive Board and the Board of Governors, and it is widely acknowledged as the most powerful member of the international system (or at least of the Western world) since the end of World War II. However, a quick glance at the evidence suggests that the U.S. might not have driven these changes in Fund conditionality. Starting in the late 1960s, the U.S. (and the Executive Board more generally) vocally criticized the Funds proliferation of conditions.9 Since then, U.S. criticism of the Fund expansion of conditionality has continued. The Reagan administration opposed the IMFs drift into longer-term adjustment programs, rather than its mandated short-term balance of payments loans.10 More recently, the Clinton Administration has criticized the IMFs expansion of conditionality and increase in longer-term adjustment loans as straying from its mandate. In December 1999, Treasury Secretary Larry Summers presented a reform program which included fundamental changes in Fund practices, including phasing out the Funds low-interest financing, increasing Fund transparency and returning to the Funds core mandate of emergency financing (with fewer
income developing countries. Therefore, this reform seems to main the Funds role as a source of longerterm development lending for lower-income developing countries. 9 Dell (1981), 12; de Vries (1986) ,504. There were two reviews of conditionality around this time, each of which was supported by the U.S. and each of which directed the Fund to limit its use of conditions. The 1968 decision limited performance clauses to stipulating criteria necessary to evaluate the implementation of the members financial stabilization program, with a view to ensuring achievement of the objectives of that program. (de Vries 1976, 347; Dell 1981, 14). The 1979 decision limited the number an content of performance criteria to those that are necessary to evaluate implementation of the program with a view to ensuring the achievement of its objectives. Performance criteria will normally be confined to (I) macroeconomic variables, and (ii) those necessary to implement specific provisions of the Articles or policies adopted under them. Performance criteria may relate o other variables only in exceptional cases when they are essential for the effectiveness of the members program because of their macroeconomic impact. (Gold 1979, 30). 10 Lipson (1986,) 229, n. The US also opposed certain high profile cases under the Reagan administration, most notably the 1981 India Extended Fund Facility program. This was the largest single transaction in the history of the Fund to date and the US initially opposed it and then abstained from the vote rather than block the program. James (1996), 333.
conditions), rather than the current load of development lending (with more conditions and a broader policy focus). 11 On first glance then, these changes in Fund conditionality do not seem to reflect U.S. preferences and therefore the U.S. does not appear to be driving these changes. If anything, the U.S.from the Reagan administration to the Clinton administrationappears to be trying to reverse the increasing stringency and intrusiveness of Fund conditionality.
Alternatively scholars have argued that changes in Fund activities must be understood as a product of bureaucratic culture or interests. Fund staff have a degree of autonomy in defining their activities, including the design of Fund conditional loan arrangements, and do so according to the dictates of their bureaucratic culture or interests. States accept the changes in Fund conditionality programs, despite their interference with domestic politics and processes, because Fund staff and state officials share a base of economic knowledge which defines the Funds recommended policies as economically sound. However, in the wide range of economic and social, sectoral, national and international policies that may be deemed economically sound, which of these make their way into Fund programs and are deemed so important that their violation would lead to an automatic suspension of a loan installment? The Fund has been advising countries and monitoring programs for years, but not until the late 1980s were countries required to implement Fund-designed investment programs and Fund-approved tax reforms as a condition of the program; not until the early 1990s was the taboo on advising countries about the redistributive consequences of certain policies lifted. Why was it acceptable for the Fund to condition use of its resources on those policies in the late 1980s and early 1990s but not sooner, or later? The decisions regarding these changes in Fund activity are political, not just economic.
A third group of scholars have argued that changes in Fund activities have been ultimately driven by the borrowing states themselves. Governments or domestic politicians use
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Kahn (1999), C3. Other US govern mental, academic and media leadersincluding The New York Times, the IFIAC Commission and the Joint Economic Committee of the U.S. Congressrallied around the Clinton Administrations proposal that the Fund restrict its lending to short-term emergency financing, rather than longer-term developmental loans focused on poverty reduction and economic growth, which make up the bulk of its current activities. The IFIAC Commission advocated this unanimously (3 of 59): New York Times (1999), A38.; JEC (Dec., 1999).
international organizations to help them fight their own domestic battles.12 Domestic politicians use Fund conditional loan agreements as political cover to implement their preferred policies and mute domestic oppos ition. 13 Therefore changes in Fund activities may represent the changing preferences or shifting mix of borrowing state governments. This explanation also seems questionable. Given that we have observed an over time change, this explanation suggests that borrower state governments domestic needs have been strikingly similar and that their domestic needs have changed in virtual unison. Why would their domestic needs be so similar? Presumably if the terms of Fund conditional loan arrangements reflected the domestic political needs of borrower governments, one would see greater variation in the design of programs and more particularistic policies which served individual borrower government domestic needs, such as side payments to constituency groups.
In this dissertation, I argue that these three alternative arguments are insufficient in explaining the changes in the activities of the International Monetary Fund. I argue that changes in Fund activity, particularly changes in Fund conditionality, are best explained by shifts in the sources of state financing and test this argument against the prominent alternatives which focus on powerful states, borrowing states or the organization itself. The sources of state financing, whether they be creditor states like the U.S., private financial interests like Citicorp, or other multilateral organizations like the World Bank, are crucial to the success of Fund loan programs. The Fund usually provides only a fraction of the financing which the country needs in order to balance its payments and implement the Fund-recommended programs. Outside funding is almost always needed and expected. Therefore, financiers are in an ideal position to make demands on the Fund regarding what sorts of terms they would like to be incl uded in a particular Fund conditionality program in order for their financing to be forthcoming. External financiers have shifted over the lifetime of the Fund, from being almost exclusively creditor states (and particularly the U.S.), to being creditor states, other multilateral organizations, and especially private financial institutions, like banks. Each type of financier has different preferences over Fund activities. Therefore, as the sources of state financing have shifted and diversified, so have
12 13
See Goldstein (1996), Milner (1998?), Richards (1999). Przeworski and Vreeland (2000).
the demands on the Fund, and hence so have the Funds activities. In short, I am arguing that these new sources of state financingprivate financial institutions and multilateral organizationshave been the driving force behind changes in the Funds activ ities. However, this argument does not dismiss the role of states in influencing Fund activity outright. Rather, it clarifies when to expect states to be most influential and what to expect the impact of their influence to be.
This dissertation focuses on the role of external financiers and their influence on Fund activities, particularly the changes in Fund conditionality arrangements noted above. Despite the increased attention on changes in Fund conditionality arrangements, very little data exists about these changes. Most studies rely on general and official statements about changes in Fund activities by the Fund staff, on information about the creation of new loan facilities with new emphases, or on anecdotal evidence from certain more publicized cases. There has been no actual data of the terms of Fund conditionality programs from representative countries over time.14 The criticisms of Fund programs have largely relied on surprisingly weak evidence, that does not allow analyses of how Fund activities vary over time and across different types of borrowers. For this dissertation, I have constructed a data set which codes the terms of 249 conditionality arrangements between 1952 and 1995 from twenty representative countries. By employing evidence from the abovementioned data set, as well as case study, interview, and archival evidence, this dissertation advances an argument about the important role of external financiers in influencing the terms of Fund conditionality arrangements. It demonstrates that external financiers have influenced the terms of Fund conditionality arrangements and that shifts in the sources of state financing help explain the changes in Fund conditionality.
14
There was an internal Fund study in the late 1960s, but this data has not been published or made public. Paper from the Secretary to the Executive Board regarding Fund Policy with Respect to the Use of Its Resources and Stand-by Arrangements, August 12, 1968. SM/68/128, Supp. 2 (S 1760 January-August, 1968). Fund staff have also recently been compiling the MONA database which records policy conditions since 1993, and have supplemented it with data since 1987. See Conditionality in Fund-Supported Programs for some graphs from this data set (http://www.imf.org/external/p/pdr/cond/2001/eng/overview/index.htm).
In the remainder of this chapter, I discuss three prominent explanations of changes in Fund activitiestwo external and one internal and derive hypotheses and predictions. The theory advanced here is explained in more detail and testable hypotheses are derived. The chapter ends with an outline of the remainder of the dissertation.
II. Alternative Arguments Three general explanations of the changes in Fund activity dominate the scholarly and non-scholarly literature on this subject.15 Each is rooted in a rich theoretical tradition and focuses on a different actor or set of actors to explain international organizational activity. Figure 1 offers a pictorial representation of these three competing perspectives. The first is state -centric and focuses on the influence of powerful states on the international organization. The second contends that bureaucratic actors or culture define international organizational activity. In other words, scholars from this perspective look inside the organization itself to explain changes in international organizational activity. The third and final alternative explanation focuses on domestic politicians or governments, the objects of international organizational activity, to explain IO activity. This section discusses these three explanations in more detail, deriving testable hypotheses or observable implications of each one. Insert Figure 1 (arg_figs.ppt)
The first alternative explanation contends that changes in Fund activity have been driven externally by powerful states. Powerful states, most often the United States, use international organizations like the Fund as tools to achieve their own foreign policy goals. For instance, Strom Thacker argues that the United States political preferences are the underlying causes of the IMFs behavior, using Fund lending data as a proxy for Fund behavior. 16 Not only the United States preferences, but also the international power balance influence the Funds activities and interactions with member states, according to Thacker. He argues that during the Cold War, the U.S. used IMF loans as carrots to entice countries to become closer aligned with the US political position, as measured by certain key United Nations votes. After the Cold War
15 16
The academic literature on the IMF is surprisingly spare. Thacker (1999).
and the collapse of bipolarity, both a countrys initial voting position relative to the United States (at time t-2 ) and its subsequent movement (from t-2 to t-1 ) are important in determining whether or not a country is granted a Fund loan at time t.
Thackers argument and ones like his have strong theoretical and institutional justifications. Theoretically, such arguments sit squarely in the realist tradition. Realism is a functional, actor-oriented grand theory which considers states to be the most important actors in the international system. Realists argue that institutions and organizations represent the interests of the powerful, not necessarily the outcome that is Pareto-optimal in a collective sense.17 International organizations are created by states, fueled by states and can be destroyed by states. For instance in a study on global communications , Krasner argues that many international institutions (or regimes) are not benign cooperative ventures. Rather, they have important distributional consequences (which point along the Pareto-frontier) and are crafted by powerful states to serve their interests.18 By this logic, changes in international organizational activity should be driven by either a change in powerful state preferences or a change in the distribution of power.19
Institutionally, the Funds design and structure suggest that states, especially powerful states, may dictate its activities. The Fund was established by states at the Bretton Woods conference in New Hampshire to serve state interests.20 Specific institutional features of the IMF lend themselves to a realist interpretation, including the IMFs sources of funding and voting rules. It is funded by states. The IMFs main source of funding is a quota system, but it also borrows from specific states from time to time. Larger economies provide most of the Funds lifeblood, contributing more through the quota system and lending additional money to the Fund
17
Typical realist works include Waltz (1979), Gilpin (1975), Gilpin (1984), Krasner (1976), and Krasner (1993). 18 Krasner (1993) argues that the neo-liberal focus on market failure problems, which involve moving to the Pareto-frontier so that everyone gains absolutely, neglects the role of power and distributional conflict. 19 The conventional wisdom regarding the IMF comes from this realist tradition and argues (or simply assumes) that the US determines IMF policies and activities. Thacker (1999) argues that the U.S. determines IMF lending policy, granting loans to countries with compatible policy positions. Jeffrey Sachs (1989) also argues that the United States determines IMF policy. Kapstein (1994, 96, especially chapter 4) assumes that the US dictates Fund activity, using the terms almost interchangeably.
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at times of high demand. The United States has always been a leading contributor to the IMF. When the IMF was founded, the U.S. provided 37.9% of its general resources (which come from quotas); now it provides 17.53%. This percentage of contribution to the General Resource Account (GRA) corresponds to the countrys voting power; therefore, countries with larger quotas also get a larger percentage of voting power. The Fund is governed by two representative bodies, the Executive Board and the Board of Governors, both with weighted voting. The Executive Board approves most day-to-day activities, including the approval of country loan arrangements and mid-loan reviews, by a consensus method where the decision is rarely explicitly voted upon but instead surmised by the Managing Director.21 Some argue that this consensus further empowers the more powerful states, which are able to define the terms of the consensus. Perhaps for these theoretical and institutional reasons, many scholars have argued or simply assumed that the U.S. determines IMF policy and lending practices.22
For those who argue that powerful states, most commonly the United States, drive the activities of international organizations like the Fund, the key explanatory variables are state power and interests. The relevant hypothesis is that changes in Fund activity are driven by exogenous environmental changes which provoke either a change in powerful state preferences or a change in the distribution of power. The ultimate source of change is exogenous to the model. In sum, the argument is that changes in Fund activity have been proximately driven by a change in powerful state preferences or a change in the distribution of power.
Realist arguments are notoriously resilient largely because they are so difficult to disconfirm; realists can argue ex post that almost any outcome was in the interest of powerful states ex ante. In this case of changes in Fund activity, realists would have to argue that powerful states, either due to a shift in the distribution of power or another exogenous shift, revised their preferences, preferring the various increases in conditionality which we have observed. While there are many different versions of a realist interpretation of Fund activity change, I test this
20 21
Most IOs are actually created by other IOs now. See Shanks, Jacobson and Kaplan (1996). Gold (1972), 195-7.
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general perspective by focusing on the preferences and influence of the most powerful state: the United States. If realists are correct that changes in Fund activity have been driven by powerful states, then certainly the changes that we observe in Fund activityincluding an increase in the length of loan arrangements, new goals of the programs, and a change in the type and an increase in the number of conditionsshould reflect U.S. preferences. I test this proposition in two ways. First, I studied U.S. preferences to see if they align with subsequent changes in Fund activities. Ex ante did the U.S. support the changes in Fund activity that we have observed ex post? In fact I show, using primary and secondary historical analysis, that the U.S. has generally preferred less stringent conditionality for those cases in which it shows a strong interest and a return to shortterm emergency financing, rather than longer-term higher-conditionality development lending as general policy. Second, I statistically tested the relationship between a U.S. interest proxy and various aspects of conditionality (number of conditions, types of conditions, review and consultation procedures) in order to see if they are positively and significantly related, as the realist argument would imply. Statistical analysis also allows me to assess how U.S. influence varies over time and across different types of cases. I find that, contrary to what realists would expect, powerful states, including the U.S., have often had a depressive effective on conditionality, the opposite of the general trend. 23 In order for a realist argument to be true, observed changes must conform with ex ante powerful state preferences. By contrast, I argue that powerful states have not been the main advocates for increases in conditionality. The U.S. did not advocate these changes in Fund conditionality ex ante. In fact the U.S. tends to depress, not strengthen, Fund conditionality for those cases in which it has greatest interest.
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Thacker (1999) argues that the US determines IMF lending, granting loans to countries with compatible policy positions; Sachs (1989); Kapstein (1994), 96. 23 A third possible test would address the realist hypothesis that Fund activities have changed as a result of shifting U.S. preferences due to the changes in the post-Cold War distribution of power. For instance Thacker (1999) argued that U.S. preferences over Fund activities changed when the international distribution of power changed after the end of the Cold War. Stephen Krasner also made a similar argument to me in an e-mail (Sept. 19, 2000) about changing U.S. preferences after the end of the Cold War. While I do not have enough post-Cold War cases to test this hypothesis thoroughly, preliminary evidence does suggest a proliferation of conditions and the introduction of new terms in the post-Cold War period. However, there have been many other changes which could equally account for this proliferation of conditions, including the increase in post-Communist transition countries and the rise in private investment.
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A second common argument is that changes in Fund activity have been driven internally by organizational actors, in this case the Fund staff. Whether employing a more rationalist or sociological logic, scholars and others argue that the IMF should be understood as an actor in itself, not just a conduit for state preferences, with autonomy to pursue its own interests or goals. For instance, Martha Finnemore argues that changes in Fund activity, particularly Fund conditionality, have been driven by the Fund staff themselves. Fund staff develop and use certain intellectual models which define the necessary conditions in Fund programs, and they include new conditions outside their area of expertise when existing models and methods fail. For instance, the Fund first began using fiscal and credit targets as key conditions in their loan arrangements due to the intellectual models guiding the Fund staff, namely the absorption and monetary (or Polak) models.24
The generic notion of IMF autonomy also has both theoretical and institutional justifications. Theoretically, there are really two main streams of theory which posit (a degree of) organizational autonomy, one using a more rationalist or economic logic and the other utilizing a more sociological or cultural logic. The two schools differ both in how they conceive of the source of organizational autonomy and the purposes to which this autonomy is put. 25 Rationalists tend to argue that organizations achieve a degree of autonomy due to principal-agent issues of informational asymmetries and incomplete monitoring. 26 Sociological or cultural approaches emphasize that the international organization is a product of its (institutional) environment, not actor interests per s, and achieves a degree of independence from states due to its expertise and externally-derived legitimacy. 27 As Barnett and Finnemore write:
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Finnemore (2000) also argues that when Fund programs failed to solve the basic balance of payments problems, Fund staff began including conditions which often conflicted with their original conditions or fell outside of their range of expertise. See also, the central theory of their edited volume Barnett and Finnemore (1999). 25 For two comparisons of these literatures, see Moe (1991)and Barnett and Finnemore (1999). 26 For an early review of the principal-agent literature and applications to organizations and public bureaucracies, see Moe (1984), esp. p. 756-758, 761, 766-771. Also see Niskanen (1971), Niskanen (1975). 27 Meyer and Rowan (1977), 341, 348, 352; Finnemore (1996), 330; Barnett and Finnemore (1999), esp. 702-706 for a literature review. Meyer and Rowan argue that organizations seek legitimacy for survival, rather than striving for efficiency or effectiveness in pursuing stated organizational goals. If there is a Darwinian selection process for Meyer and Rowan, it is for the most legitimate (or socially fit), rather than
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IOs can become autonomous sites of authority, independent from the state principals who may have created them, because of power flowing from at least two sources: (1) the legitimacy of the rational - legal authority they embody, and (2) control over technical expertise and information. 28 For those from the rationalist school, IOs use their autonomy to pursue the narrow, self-interested goal of survival, often operationalized as budget or task expansion. The sociological school by contrast, argues that IOs use their autonomy to pursue activities determined by their specific bureaucratic culture, for instance determined by their professional disposition or other particularistic factors; organizations can use that autonomy to impact our social understanding of the world around us, by classifying and defining actors and developing and spreading new norms.29
In addition to this theoretical justification, the Funds structure may also lend credence to the notion of organizational autonomy. First, in a standard principal-agent sense, the Fund staff know more about their work and the individual country cases, and this promotes autonomy in defining problems and programs; the complexity of the Funds work only exacerbates this. Second, the Funds historical opacity protects the Fund staff, by insulating it from intensive lobbying by domestic interest groups and subsequently depressing state activism in controlling their activities.30 Finally, the Fund staff have agenda-setting powers, in that they create the proposals which are consequently voted up or down by the Executive Board. 31 Moreover, the Executive Board rarely votes down or even modifies staff proposals, particularly concerning loan
the most efficient or economically fit. As Meyer and Rowan write, independent of their productive efficiency, organizations which exist in highly elaborated institutional environments and succeed in becoming isomorphic with these environments gain the legitimacy and resources needed to survive. See also Ascher (year?) for a study of the World Bank. 28 Barnett and Finnemore (1999), 707. 29 sic, Barnett and Finnemore (1999), 710-715. 30 In other words, since their activities are largely hidden from domestic interest groups, that depresses domestic interest group activism. The recent push for IMF transparency in the 1990s has resulted in increased domestic interest group activism. 31 Finnemore (2000). For a rationalis t view on the importance of agenda-setting powers and how these powers give the agent a degree of autonomy, see Romer and Rosenthal (1978).
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arrangements. This suggests that the Fund staff have an overwhelming amount of discretion in choosing its actual activity outcome (within the acceptable range defined by states).32
A single alternative hypothesis of Fund activity change from this organizational autonomy camp is difficult to derive. As discussed, the two different schools have different understandings of when to observe organizational autonomy and what to expect from autonomous organizational activity. Since Finnemore directly addresses the question of changes in Fund activity and particularly Fund conditionality change, her argument is tested. She suggests that changes in Fund activity have been driven by changes in the intellectual models developed and used by Fund staff, or changes in the causal beliefs of Fund staff members.33 The hypothesis derived from her argument is that changes in Fund conditionality have been driven by the Fund staff, either by their development of intellectual, causal models or through their trial -and-error attempt to design successful programs.
Finnemores argument is difficult to test due to the contentiousness of developmental economics, the difficulty of unearthing the particular models used in constructing different Fund conditional loan arrangements, and the chicken-egg nature of the problem. Specifically, it is unclear whether conditions are adopted because a particular intellectual model instructs them to do so, or more cynically whether the intellectual model is adapted to the changing use of conditions. Does the intellectual rationale come before or after the adoption? Finnemore also argues that Fund activities change when existing models prove faulty and staff pathologically try new methods, often outside of their area of expertise and mandate. This is equally difficult to test for two reasons: there is no agreed-upon definition of a failure point for Fund programs, and the argument gives little indication of how to predict the content of new activities pathologically proposed by Fund staff at moments of failure.
32
Key observers at the Fund have also frequently argued that staff have a great deal of independence. As early as 1969, the Funds historian, Keith Horsefield, wrote that the increasing staff independent and influence was undeniable, even a revolution. Horsefield (1969), 470-3. See also Southard (1979). 33 Causal beliefs is not Finnemores language. Causal beliefs are beliefs about cause-effect relationships which derive authority from the shared consensus of recognized elites according to Goldstein and Keohane (1993).
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However, two (potentially) observable implications of Finnemores argument allow me to assess it. First, one observable implication of the sociologic al argument is that there should be program convergence or increased program uniformity during periods of normal science, when the coherent, shared knowledge model is being employed by the Fund staff. During paradigm testing periods, when the Fund displays pathological organizational tendencies by including conditions outside their area of expertise and that conflicted with more established conditions, we would expect less coherent and uniform program design. 34 Finnemore identifies the 1990s as a period when program failure prompted such pathological organizational activity. Second, Finnemores argument suggests that the introduction of new conditions is often at the impetus of the staff, either because these new conditions fit with their intellectual models or because the staff are searching during times of failure.
The third argument contends that changes in Fund activity have been driven externally by demands from borrowing state governments. Both political scientists and economists view international organizations as tools (or servants) of their clientele. However, they part company in how they conceptualize the needs of borrowing state governments. Political scientists consider borrowing governments demands to be a product of their politic al interests. For instance, Przeworski and Vreeland have argued that governments enter into Fund conditional loan arrangements to bolster their position against domestic opponents of their preferred policy. 35 The generalizable insight is that domestic politicians use international organizations or institutions to help them win domestic battles or tie their own hands. 36 Economists, by contrast, consider borrowing governments demands to be a product of their objective economic needs. The Fund itself often employs this explanation, arguing that changes in Fund conditionality have been driven by the changing economic needs of borrowers.37 The official position is that borrowers with excessive foreign debt or structural impediments to growth have increasingly turned to the Fund for assistance, requiring more detailed and intensive Fund programs.
34 35
Kuhn (1996). Przeworski and Vreeland (2000), 391. 36 Goldstein (1996), Milner (1998?), Richards (1999), Root, Weingast, Przeworski and Vreeland (2000). 37 e.g., http://www.imf.org/external/np/pdr/cond/2001/eng/overview/index.htm . Conditionality in FundSupported Programs -Overview Prepared by the Policy Development and Review Department, p. 2.
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Despite these different ways of conceiving of borrower demands, political scientists and economists often define these demands substantively as the same thing. For instance, political scientists may assume that domestic politicians want policies which foster economic growth. Political scientists may define domestic political needs as exactly those same policies which economists consider necessary.38 Despite this potential convergence of predictions, political scientists and economists employ different logics which suggest different tests and key variables.
Political scientists from this domestic politics camp argue that changes in IO activity are driven by the demands of domestic politicians. Since the needs of domestic politicians vary based on domestic political institutions, a key explanatory variable is regime type. One hypothesis would be that domestic politicians from democracies, with viable and active oppositions, would be more likely to try to tie their own hands via international agreements, institutions or organizations. Hence, if a country is more democratic, it is more likely to demand a higher conditionality Fund loan agreement. As the mix of borrowing countries becomes more democratic, they demand more constraining arrangements from the Fund and the Funds activities change. This hypothesis can be tested statistically by including a democracy variable in my statistical analysis. In addition, an implication of this argument is that we should observe broad variation in the types of conditions required by Fund arrangements, to reflect the varied political needs and individual battles of domestic actors.
While political scientists focus on domestic political attributes, economists focus on economic attributes. As the economic needs or attributes of borrowing member states change, so do the activities of the Fund including the terms of Fund conditional loan arrangements. In order to test this hypothesis, I control for certain economic variables, including the borrowing countrys current account relative to gross national product and the level of development (operationalized as constant income per capita), in my statistical tests of the competing arguments. One would expect and certainly hope that these variables are significant, that the requirements of the Fund programs reflect the particular economic needs of borrowing member states. However, even if
17
these variables are significant, the political link remains glaringly absent. This economic explanation begs the question why the Fund is empowered to expand its power and activities in the face of a changing functional environment, why the Fund is able to fill the vacuum created by these new needs. Even in the face of new needs and problems, a political actor, whether it be the borrowers, the powerful states, the organization itself, or the external financiers, would need to assign or approve this expansion of Fund activity. The agent is missing from this explanation and thus the puzzle remains.
The tests and assessments of the realist, sociological and domestic politics counterarguments are discussed in the chapters that follow. In short, while powerful states, borrowing states, intellectual models and bureaucratic actors no doubt influence Fund activity, many of the key observable predictions discussed above are not demonstrated empirically. Important aspects of change in Fund activities are left unexplained by these three alternative arguments. These explanations omit an important factor in explaining changes in Fund activities: the changes in the sources of state financing and the interests and preferences of external financiers.
IV. Argument
Changes in Fund activities have been driven by changes in the sources of state financing. State financing in the post-war period has shifted from being provided solely by states (almost entirely by U.S.) to being provided by a diverse set of creditor states, private financial interests and multilateral organizations. These financiers are able to influence IMF conditionality. The Fund often provides only a fraction of the amount of money needed to balance a countrys payments in that year and implement the Funds recommended program. The Fund relies on supplementary, external financing to ensure the success and feasibility of its programs. This gives the external financiers some leverage over the design of Fund programs. Banks, creditor states and multilateral organizations do not all have the same preferences over what the Fund should do and what should be included in a countrys conditional loan arrangement. Therefore,
38
e.g., Przeworski (1991?).
18
as the sources of state financing have diversified and shifted, so have the demands on the Fund and consequently so have the Funds activities. Insert Figure 2 (arg_fig.ppt)
A. Theoretical antecedents. The argument that I am advancing is built on the central insights from two generations of liberal theory: that international actors may be not only states, but also sub-state, transnational or international/intergovernmental actors, and that international institutions (and organizations) help facilitate mutually-beneficial exchange between international actors. In other words, I am trying to harness the powerful insights of the neoliberal institutionalist turn, without accepting its statecentric ontology. 39 While the state-centric turn in liberal theory may have had certain advantages (e.g. increased parsimony, more obvious and falsifiable predictions), it encouraged scholars to narrow the range of their questions and answers, ignoring the potentially determinant role of nonstate actors in international politics and possibly missing key international relationships that produce important political and economic outcomes. In studying the International Monetary Fund, I have focused on the influence of the external financiers which include creditor states, and also private financial institutions and other multilateral organizations, on Fund activities. I have tried to avoid some of the pitfalls of the transnational liberal strain by specifying actors and actor interests ex ante , and by testing if the influence of these actors on IO activity change is observable, as hypothesized. This section focuses on the neoliberal institutionalist insights and the reasons for broadening our analysis of the Fund to include non-state actors.
The trademark neoliberal institutionalist (hereafter neoliberal) focus is on collective action problems, specifically dilemmas of common interest, 40 and generally on making exchange, broadly construed, between actors more efficient by restructuring incentives. The idea is that, absent cooperation, state interaction results in a Pareto-suboptimal outcome. If states cooperate and agree to jointly alter their actions, they would all be better off (or at least not worse
39
For the first, see Keohane and Nye (1972, 1977). For the second, see Keohane 1984. For a more recent liberal perspective that focuses on the importance of non-state actors, specifically sub-state actors and institutions in defining state preferences, see Moravcsik (1997).
19
off) and move to the Pareto frontier. However, states face a market failure problem. There are certain barriers to cooperation which prevent states from reaching this better outcome. International institutions and organizations (IIs and IOs) allow states to overcome these roadblocks to cooperation. They can help actors achieve more optimal outcomes by restructuring incentives to overcome credible commitment, transaction cost and incomplete contracting problems. They can increase the benefits and reduce the costs of cooperation by lengthening actors time horizons through iteration, fostering issue linkage and side-payments, creating a focal point and increasing information. 41 In this way, institutions and organizations allow governments to attain objectives that would otherwise be unattainable.42 International organizations are therefore both fora for interstate cooperation and agents in state cooperation, because of their capacity to help re-structure states incentives, thereby enabling all states to achieve greater absolute gains.43
In a typical neoliberal analysis of the Fund, von Furstenberg argues that the IMF promotes more efficient exchange between debtor and creditor states and thereby helps both sets of actors achieve a more optimal outcome. The Fund acts as an agent and market-maker intermediating between [creditor and debtor, surplus and deficit] nations.44 He writes: The comparative advantage of the Fund, indeed its reason for being, lies in its ability to facilitate exchanges involving external financing and economic -policy measures between creditor and debtor countries. These exchanges might otherwise be thwarted by nonexcludability problems attaching to bilateral agreements reached without the Fund.These mutually beneficial trades between nations might not otherwise have taken place at all, or might have taken place only at much higher transaction costs and with negative side-effects that are avoidable. 45
40 41
Stein (1982). Keohane (1984), p. 91, ch. 6. 42 Keohane (1984), 97. As Krasner (1993, 239) points out, the assumption is that outcomes are currently Pareto suboptimal, so that a new outcome can be devised whereby at least one actor can gain without compromising the utility of others. 43 Abbott and Snidal (1998). The traditional neoliberal emphasis is clearly on vehicles of inter-state cooperation, recent scholarship has recognized an important role of international organizations as independent monitors, information disseminators, and dispute settlers. Abbot and Snidal (1998) argue that international organizations are not only sites of but also agents in state cooperation, by virtue of two unique attributes: their centralization and independence. This article combines neoliberal and sociological arguments; in addition to the traditional neoliberal functions for IOs, Abbot and Snidal argue that IOs legitimate and de-legitimate certain state activity and develop and spread certain shared values. 44 von Furstenberg (1987). 45 von Furstenberg (1987), 122.
20
Von Furstenberg argues that Fund activity should be understood as a mutually beneficial arrangement which facilitates creditor state lending (via the Fund) to debtor states. The relevant actors are only states. He admits that private creditors are also important sources of debtor state financing, but argues that they merely rely, rather than making demands, on the IMF.
For neoliberals, the key actors are states and therefore international institutions and organizations help facilitate exchange between states. While this simplifying assumption may be analytically useful and even accurate in the case of some international institutions and organizations, it is misleading in the analysis of the International Monetary Fund. In seeking to protect international monetary stability and facilitate exchanges involving external financing and economic policy measures, the Fund no longer deals exclusively with states, but also deals with other key actors in international monetary and financial affairs.46 International monetary stability is not the exclusive domain of states. Speculative capital and mobile bank deposits, not just governmental commitments, determine the rates of currency exchange. Flows of international finance move among many different players, including states, banks, multilateral organizations, and other private investors. Creditor states are no longer the main source of debtor state financing (and are not the only creditor which might benefit from the Funds capacity to make debtor states commitments more credible, monitor their policies, and provide signals as to debtor state creditworthiness). Therefore, in the case of the IMF in particular, scholars have relaxed the state-as-actor assumption. Benjamin Cohen and Charles Lipson have separately argued that the International Monetary Fund has adjusted to the changes in the international economic landscape by promoting efficient exchange between private financial interests and debtor states, rather than exclusively between creditor and debtor states.
In the early 1980s, both Cohen and Lipson wrote that commercial banks, flush with OPEC deposits, had taken over the role of balance of payments financing from official bilateral and multilateral lenders, like the Fund. Both also argued that this shift in balance of payments financing prompted the Fund to adapt to a new role. For Cohen, the Fund helped countries
21
establish their creditworthiness with the banks and helped the banks determine which countries should receive a loan. Banks faced a problem in loaning to countries: they could not guarantee that countries would pay back loans, pursue responsible adjustment policies, and generally act in a creditworthy manner.47 Banks relied on the Fund as a de facto certifier of creditworthiness because it had the legal or political leverage to dictate policy directly to a sovereign government.48 For Lipson, the banks were well-organized; they had made their initial loans on their own and ensured that solvent debtors would honor loans through a coordinated system of sanctions.49 The Fund assisted commercial banks and debtor countries only in times of crisis, when a sovereign debtor proved insolvent. During those times, the Fund entered the scene as an independent technical expert, advising countries on their adjustment programs and monitoring their follow-through. 50 Lenders found IMF participation valuable; they accepted the IMF agreement as a signal that the debtor intends to crack down on its deficit[and] typically renegotiated their own claims on that condition.51 After the 1982 Mexican debt crisis, Lipson argued that the Funds role in international debt crises expanded. 52 Fund arrangements are still a quid pro quo for rescheduling, but now the Fund also specifies the amounts of new credits that private sources must contribute.53 Essentially, the Fund demands new credits from banks in exchange for its advisory and monitoring services with debtor states.54 Thus for both Cohen and Lipson, the Fund is now addressing the collective action needs of private financial actors and making exchange between private creditors and debtor countries more efficient. Theirs is a
46 47
von Furstenberg (1987), 122. North and Weingast (1989); Root (1989). 48 Cohen (1983), 332. The procedure is favored by lenders because of the Funds high professional standards, access to confidential information, andabove allrecognized right to exercise policy confidentiality. 49 Lipson (1981), esp. 606-608. 50 sic, Lipson (1981), 606. 51 Lipson (1981), 618 52 Lipson (1986), 240. He writes that Greater public involvement [since the debt crisis] in international debt issues can best be understood as a series of incremental reforms designed to overcome inherent gaps in private cooperation (ital. in original, Lipson (1986, 220). In discussing how the IMF, World Bank and BIS have evolved to accept roles in resolving debt crises, Lipson argues that the growing role of public institutions in managing international debt is a response to coordination failure among private creditors and is limited by the extent of those failures. Lipson (1986), 240. 53 Lipson (1986), 222. 54 Lipson (1986), 232. Lipson argues that the Fund makes these demands on private creditors in order to make good on its bargain with debtor countries, that if they adhere to Fund programs they will receive outside financing
22
typical neoliberal perspective, except that the creditors are banks, not states. The important actors are therefore not just states.
Cohen and Lipson recognized that the Fund is meeting the collective action needs of private actors, like banks, and smoothing exchange, including new loans and debt reschedulings, between debtor states and private commercial banks. A Fund program acts as a good housekeeping seal of approval, increasing the creditworthiness of debtor countries and provoking an inflow of outside financing. 55 According to their argument, the Funds role but not its activitieschanged during the early 1980s. The Fund shifted from being a main source of balance of payments financing to being a facilitator of balance of payments financing by serving as a good housekeeping seal of approval and approving and monitoring a countrys adjustment programs. The Funds day-to-day activities of supporting economically-sound loan programs with member countries in payments deficit remained largely the same. However, due to the changes in the international economy, those activities took on new meaning. Cohen and Lipson did not argue that banks, or other new sources of balance of payments financing, directed Fund activity or contributed to the changes in Fund activity, but the analytical leap is certainly not a long one.
In this dissertation, I argue that the changes in Fund activity have been driven by the sources of state financing. In contrast to Cohen and Lipson, I argue that the Funds role itself has remained constantas a facilitator of supplementary financing to borrowing member statesbut the content of Fund activities and its interactions with member states have changed. The sources of state financing, whether they be creditor states, private financial institutions, other multilateral organizations or all three, are the effective principals directing the activities of the Fund, not states exclusively. They are able to direct the activities of the Fund because they help control what the Fund staff value most: the short-run success of Fund programs and the Funds bargaining leverage with borrowers.56 The changes in Fund activities have therefore been driven by the shifts in the sources of state financing. Financing has shifted from being provided solely
55 56
Cohen (1983), 332. On this point, he also cites Magnifico (1977), Lipson (1979), and Neu (1979). Lipson (1986, 232) also makes the second point.
23
by states, mainly the U.S., to being provided by a diverse set of states, multilateral organizations, banks and private investors with different preferences over Fund activities. As the Funds principals have shifted and diversified, so have the Funds activities.
Therefore, the argument advanced and tested in this dissertation builds off of the insights of neoliberalism: that international institutions and organizations facilitate mutually-beneficial exchange between actors and are directed by those actors. However, the actors who direct and are served by the IMF are not only states, but also other sources of states financing including private financial institutions and multilateral organizations.
B. The Principals: External Financiers In the last section, I introduced the notion that the International Monetary Funds effective principals are the sources of state financing, not states exclusively. This section clarifies the principal-agent relationship generically and expands on the logic as to why new sources of state financing have driven changes in the Funds activities. In short, the sources of state financing (which I also call supplementary or external financiers) have different preferences over Fund activities. Therefore, as the sources of state financing shift and diversify, so do the demands on the Fund and consequently so do the Funds activities.
A principal-agent relationship exists when a principal delegates certain tasks to an agent.57 Principal-agent relations are ubiquitous. Principals are those who delegate authority and agents are those performing the delegated task on behalf of the principal. 58 Principals often face a dilemma because they cannot perfectly and costlessly monitor the agents actions and information.59 The divergence of interests between the principal and agent, the costs of monitoring and the informational asymmetry between principal and agent results in a cost or loss, a deviation between the principals instructions and the agents actions. The agent has an incentive to slack and not perform the delegated task as diligently as the principal would like,
57
There is an extensive literature on the principal-agent relationship as it applied to a variety of circumstances, see Pratt and Zeckhauser (1985), 2-3; Moe (1984). 58 Kiewiet and McCubbins (1991), 5.
24
both because the interests of the principal and agent diverge (inherently or assumed) and because the agent knows more about how it has performed the task than does the principal. The principal may want to monitor the agents activities; however, because monitoring is costly, the principals monitoring will always be imperfect. Much scholarly work has focused on how principals attempt to reduce this agency cost by restructuring the agents incentives to align with theirs.60
The formal structure of the Fund suggests that member states are the Funds most relevant principals. States established the International Monetary Fund to serve their interests and have delegated certain responsibilities, including monitoring members adherence to maintain open payments and exchange relations, to the Fund. The most obvious conclusion would be that states continue to function as the Funds principals, dictating and controlling Fund activities. However, states efforts to control the Funds activities are stymied by typical principal -agent informational asymmetry problems and the particular weakness of their formal and informal controls.
The states face the standard principal -agent difficulties of being unable to perfectly monitor the Funds activities. However, this is exacerbated by certain practices with respect to Fund loan arrangements. For instance, conditional loan arrangements are negotiated in the state capital rather than at Fund headquarters, which increases the informational asymmetry between the Executive Board and the Fund staff. As the Funds historia n, Keith Horsefield wrote, the change in location: led to the staff acquiring a much more intimate knowledge of the problems of each member country than was possible for any Executive Director except the one who has been appointed or elected by that country the result was that the Board came to be faced with draft stand-by arrangements and letters of intent that had been prepared by the staff in consultation only with the member countryor at most with the Executive Director immediately concernedand which contained conditions drafted by the staff itself. 61
59 60
Pratt and Zeckhauser (1985), 2-3. See also Maltzman (1997), 10-12. 61 Horsefield (1969), 470-3.
25
Staff continue to negotiate arrangements with country representatives and present them as fait accompli to the Board for approval. Second, the lapse of time procedure allows certain staff proposals to be automatically approved without an Executive Board vote or discussion after a specified lapse of time, if the matter had not been proactively raised by one of the Board members. This resulted, and continues to result, in a large number of waivers, extensions and other consequential matters being approved without discussion or vote by the state representatives.62 State representatives therefore have a difficult time accurately monitoring the staff to ensure that staff activities conform to their preferences.
Even when deviations from state instructions are observed, states may not be able to effectively control the staffs activities and enforce their preferences. Formally, the Executive Board approves Fund activities, including each Fund condit ional loan arrangement, and therefore states collectively have an effective veto over all Fund activities. However, the Executive Boards formal controls, specifically its veto power, do not effectively control Fund activities because the Boards veto threat is not credible. Logically one would only expect the staff to act perfectly in the states interests if their interests were perfectly aligned, which is doubtful, or if the Executive Boards veto threat were credible.63 The Executive Board cannot credibly threaten to reject a wide range of proposals that do not match their preferences because of the high costs of rejection. There are two large costs of rejecting a proposed conditional loan arrangement which effectively deter the Executive Board from rejecting most proposals within a broad range of acceptability. First, such a rejection would cause undue harm to the borrowing country. The Fund is involved in a two-level bargaining game.64 By the time the arrangement reaches the Board, bargains have already been struck between the Fund and the borrowing country, and between different interests in the borrowing country. Undoing the bargain at that point would potentially
62 63
Horsefield (1969), 470-3. The agent knows that the principal has difficult observing deviations. Therefore, in order for the principal to effectively deter agent (Fund) deviations, the principal (EB) must be able to credibly threaten immediate, non-negotiable and severe punishment against even small observed deviations (veto, demotions, etc.). See for example the discussion of credible threats and bright-line commitment strategies in Downs and Rocke 1990, 184-90; Downs and Rocke 1995, 98-99. 64 On two-level games, see Putnam (1988).
26
cause a devastating loss of confidence in both the domestic and international arenas. As Ernest Sturc, then-Director of the Exchange and Trade Relations Department, stated: The establishment of these criteria involved many policy decisions and compromises between sectors of the members economies which were difficult to achieve. Even assuming that the Board discussion led to an easing of a criterion,there would be many new problems for the government in relation to other sectors of the economy since its understanding with these sectors were reached in the light of the over-all policy package for the period ahead.65 Executive Directors realize this. Second, rejecting a proposed conditional loan arrangement would damage the Fund staffs future bargaining leverage. Fund staff members bargain with representatives from borrowing member states and reach an agreement before presenting this agreement to the Executive Board for approval. If the Executive Board rejected a negotiated agreement, the credibility and future effectiveness of Fund staff members in future negotiations would be jeopardized. Therefore, the Board has a strong incentive to ratify all agreements which are brought before it, within a rather wide range of acceptability, even if the agreement does not reflect their preferred policy exactly. 66 Board meetings give Executive Directors an opportunity to voice approval or disapproval of certain aspects of a particular program in order to make their preferences known for future programs, but do not generally impact current programs. The high costs of rejecting a staff proposal generally make that option the least preferred. The staff therefore have discretion in designing loan programs, within a wide range deemed acceptable by the Executive Board collectively and the Funds main shareholders specifically, both of which have veto power.
65 66
EBM/68/128 Use of Funds Resources and Stand-By Arrangement 9/6/68, p. 6. A quote for the Italian ED, Palamenghi-Crispi, from the 1968 debates serves as an excellent example of this. The minutes read: Mr. Palamenghi-Crispi was of the view that even if Executive Directors looked very carefully at individual stand-by arrangements, they would not be in a position to do much to improve any particular stand-by arrangement.[His understanding was that] in considering a request for a stand-by arrangement, the Executive Board was rather like a parliament called upon to ratify a treaty. All that the Board could do, after having expressed its opinion, was to approve or refuse the request; the Board could not change any performance clause without either referring back to the member thus addected or, in certain cases, completely renegotiating the stand-by arrangement. A refusal to approve a stand-by arrangement would be a serious matter, even when certain changes in that stand-by arrangements could be of benefit to the member concerned. Any change in the stand-by document would entail some considerable delay as a new staff mission would have to return to the member country concerned, renegotiate the stand-by arrangement, and prepare a revised paper for the consideration of the Executive Board. Such a delay would be to the detriment of the member concerned, as requests for purchase transactions or stand-by arrangements usually meant that these was an urgent need to use or have available the resources requested. EBM/68/131 Use of Fund Resources and Stand-By Arrangements, 9-20-68, p. 6-7.
27
In addition to rejecting an individual conditional loan arrangement or commenting on their approval or disapproval of individual features of a loan arrangement, the Executive Directors also issue general policy directives which are intended to guide staff activities and make their preferences over staff activities clear. However, even decisions on the part of the entire Executive Board or preferences articulated by powerful Board members in the context of these general conditionality policy discussions often are ineffectual in altering the basic trend of Fund conditionality increases. For instance, the 1979 new guidelines for conditionality, a product of much Board debate, emphasized that performance criteria should be limited, both in number and type. In type, the performance criteria should be limited to macroeconomic variables and those necessary to implement specific provisions of the Articles. During that discussion on conditionality and others, the United States Executive Director, Sam Cross, stressed that the Fund should concentrate on balance of payments financing for relatively short-term adjustment and the [World] Bank on other forms of financing for economic development on a longer-term basis. He argued that most arrangements should last around a year and at most three years, and that criteria should be broad, aiming at correcting an economy and avoiding intervening in members decisions on how to allocate expenditures.67 Empirical data shows that none of these state demands were respected.
States may also control the Funds staff informally, outside of the Executive Board meetings. However, until recently most states had infrequent, if any, informal contact with the Funds staff. The most common occasions for contact outside of the Executive Board meeting were negotiations for a countrys own Fund loan arrangement. A few other creditor countries, namely the U.S., have maintained more frequent informal contacts between their government or Executive Directors office and the Funds staff. However, even these contacts were surprisingly infrequent until recently. For instance, in the early 1980s, the US government maintained a rather hands off approach with the Fund. Contact was limited to holding briefings with Fund staff on a monthly basis and meetings between Treasury staff and the Managing Director about three
67
de Vries (1986), 504; E.B. Decision No. 6056-(79/38), March 2, 1979; International Monetary Fund (1983), p. 20-23.
28
times a year.68 Most contacts ran exclusively through the Treasury and Executive Directors office.69 Recently informal contacts have increased. More U.S. governmental departments are establishing independent lines of communication with Fund staff members and contact is more frequent. In addition, Board members have requested informal briefings with Fund staff members for country loan programs with systemic importance, so that their preferences can be expressed before the negotiations with the country are completed. 70 In sum, due to informational asymmetries and the costs of monitoring, states can only imperfectly observe staff activities. Even when staff activities deviate from state preferences, states informal and formal control mechanisms are weak. Recent efforts by Board members to increase ex ante informal briefings may help states overcome these problems to some extent. However for the time period which this study covers1952 to 1995state control of Fund activities appears to be uneven at best.
Multiple principals compete for control of the International Monetary Fund. Formally, member states delegate responsibilities to the Fund, including monitorin g and financing tasks. States efforts at controlling the Fund are stymied because they do not appeal to the Funds natural incentives. The Funds relationship with supplementary financiers, by contrast, is not a formal authoritative one. However, supple mentary financiers are more effective at influencing Fund activities because they appeal to the Funds natural incentives: the success of Fund programs and the Funds bargaining leverage with borrowing member states. The supplementary financiersincluding creditor states, commercial banks, private investors and other multilateral organizationshelp the Fund pursue its own interests, namely the success of Fund programs and the Funds bargaining leverage with borrowers. The IMF and its bureaucrats want to make a measurable difference in the economies in which they intervene. They want to be successful economists, influencing the direction of the international economy by applying their theoretical principles. They want IMF programs to be successful at measurably improving borrowing countries economies, particularly by preventing and managing financial crises.71 Supplementary
68 69
Interview with author, August, 2000. Interview with author, August, 2000. 70 Interview with author, February 11, 2000. 71 In a recent address, the new Managing Director, Hrst Kohler, argued that in order for the Fund to meet its mandate of overseeing the international monetary system in order to ensure its effective operation,
29
financing is key to both the short-run success of the Funds programs and to the Funds future bargaining leverage with borrowers.72
Capital inflow, from sources of supplementary financing like states, banks, investors and other multilateral organizations, is determinant of the success of a Fund program for three reasons: such financing is necessary for the country to implement the Funds recommended policies and balance its payments in that given year; capital inflow is a stated goal of Fund programs; and the Fund staff (and others) actually use capital inflow as a metric of the success of the Fund program. 73 Capital inflow is not only an important factor in the success of Fund programs, it is also one of the few determinant factors over which the Fund can exercise some decisive control. Observers of the Fund have often referred to the capital inflow observed after the negotiation of a Fund program as a catalytic effect, as if an IMF loan provokes a knee-jerk reaction from investors or banks.74 In fact, it is nothing as spontaneous as that; much of the capital inflow is explicitly negotiated and controlled. Recent scholarship has attempted to substantiate or disprove whether Fund programs truly prompt an inflow of capital. 75 However, attempts at comparing capital inflow for Fund program countries to non-program countries misses the point.76 Countries which turn to the Fund and are in periods of crisis would naturally face lower levels of capital inflow than non-program, non-crisis countries. Whether or not Fund
the Fund has two major roles: crisis prevention and crisis management. IMF Survey. (August 14, 2000), 259. 72 Lipson (1986, 232) also makes the second point. 73 See Schadler et. al. (1995). This in-house IMF assessment of stand-by and extended arrangements uses capital inflows as an indicator or whether or not a particular program was successful, e.g. discussion of Yugoslav case on page 21. Schadler et. al.; also giving confidence has been a Fund program goal from the beginning. This has given the Fund staff a legitimate excuse to take account of the financial markets reactions to their program design, e.g. de Vries (1976), I, 344. 74 Goreuax (1989); Pauly (1997), 122. For an opposing viewpoint, see Bird (1995). However, Bird is not clear how he (or the other authors he references) measures the catalytic effect. It does not appear that they include debt reschedulings, which is an important element of the catalytic effect for many debtor countries. 75 For example, see Bird (1995), especially 119-124. See also Edwards (2000). There are three problems with much of the literature that contends to empirically demonstrate no catalytic effect. First, they do not include all elements of the catalytic effect, for example including debt re-schedulings. Second, there is often a selection bias. Third, analysts sometimes misinterpret the findings. For instance, Edwards (2000) finds that countries which performed well on past Fund programs do not attract added inflows of so-called catalytic finance. Whereas countries with poor previous performance/compliance experience decreases in capital inflows. He interprets this as no catalytic effect. To the contrary, good performance countries are clearly rewarded for their good behavior by not experiencing the decreases in capital inflow which would otherwise occur. The status quo for these countries is necessarily lower because they are in crisis.
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programs prompt spontaneous or above-average levels of capital inflow may remain a point of debate; however, clearly Fund programs do cause capital inflows by explicitly negotiating their programs in conjunction with other funding, explicitly acknowledging funding from other sources in the terms of their arrangements, and in some cases going as far as requiring a certain amount of outside funding in order to begin the Fund program or assisting the country in negotiations for outside aid, credit or investment.77 The Fund plays an important role in securing fresh funds or coordinating lenders to reschedule existing debt.78 In turn, the Fund relies on these sources of outside funding to ensure the success and feasibility of their programs, and this reliance gives the supplementary financiers some leverage over the Fund.
These supplementary financiers are able to influence the terms of conditionality arrangements and exercise control over the IMF both because they help determine the success of Fund programs and because they impact the Funds bargaining leverage over borrowing member states.79 This second point is addressed at more le ngth in the next section on Fund power. In short, borrowing member states enter into Fund programs not only because of Fund financing but because of the supplementary financing which tends to accompany a Fund program. If this supplementary financing is not forthcoming, in the future the borrowing member states may be less likely to agree to the Funds conditions or even turn to the Fund in the first place.
Supplementary financiers recognize the Funds dependence on their financing and consequently make demands on the Fund in order to have the Funds activities, particularly Fund conditionality arrangements, serve their interests. Jacques Polak, the former Director of Research
76 77
Most studies have not adequately controlled for selection effects. See Einhorn (1979) for an early empirical study of this regarding SAF and ESAF programs. Also see Polak (1991, 58) which describes the Fund formally securing capital for borrowing countries. Schadler et. al. (1995, 14) also describe securing external financing as one of the three central elements of a Fund program. 78 Lipson (1986). 79 Like most principal-agent relationships, the IMF and supplementary financiers are mutually dependent. The supplementary financiers depend on the IMF for certain information about the countries and this information coupled with the Funds own financing gives the financiers extra assurance regarding their investments. The IMF in turn depends on the supplementary financiers to ensure the success of its programs.
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and a former Executive Director to the Fund, sums up the Funds reliance on the supplementary financiers and how the banks, in this case, have in turn made demands on the Fund: Traditionally, a key component of any Fund arrangement was that the resources provided by the Fund together with those from the World Bank, aid donors, commercial banks, and other sources, would cover the countrys projected balance-of-payments gap. In the absence of an integral financing package, the Fund could not be confident that the degree of adjustment negotiated with the country would be sufficient. To this end the Fund sought financing assurances from other suppliers of financial assistance. In the second half of the 1980s, however, commercial banks began to exploit this approach. No longer afraid of becoming victims of a generalized debt crisis, the banks began to realize that they could insist on favorable terms for themselves by blocking a countrys access to Fund credit (and to other credit linked to a Fund arrangement).80 Thomas Dawson, the current Director of External Relations at the Fund and a former Executive Director for the United States, has called the expansion of Fund conditionality mission push, rather than mission creep, for just this reason. 81 Increases in Fund conditionality have been pushed by supplementary financiers; he particularly notes bilateral lenders and other multilateral organizations. The Funds stamp is not fully corruptible; certainly its economic expertise is valued. However, supplementary financiers are able to demand changes at the margins, for instance adding conditions which serve their particular interests. This example of a monitor or expert being subject to influence is different than others in the institutional literature because the IMF is not driven by income, like in a typical account of a corruptible monitor, but rather by success. The IMF is not being dishonest by taking bribes for material gain, but rather by accepting amendments to its policy program in order to ensure adequate supplementary financing and increase the probability of success for its conditionality programs.82
The sources of state financing have shifted and diversified since conditionality was established in 1952. Initially this outside funding came largely from the U.S. government,
80 81
Polak (1991), 15 Interview with author. 82 On who monitors the monitor?, see Moe (1984) p. 750-1; Alchian and Demsetz (1972). Alchian and Demsetz argue along Coasian lines that a hierarchical organization can be more efficient than market organization under certain circumstances, particularly more complex production. However, one dilemma is how to monitor individuals inputs and prevent shirking. They suggest hiring an outside (or inside) monitor and alleviating the who monitors the monitor problem by establishing incentives for her to monitor as effectively as possible, utilizing the residuals.
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particularly the U.S. Treasury and the U.S. Export-Import Bank. 83 However, as the U.S. balance of payments shifted from surplus to deficit during the 1960s, U.S. bilateral loans to other countries dwindled. Starting in the 1960s, but particularly in the 1970s and 1980s, the funding stream had shifted and came not only from states, but also from banks, either through new loans or through reschedulings. 84 This marked a big change in the financing of developing countries and balance of payments deficits.85 Banks, flush with petrodollars, dramatically increased their lending to developing countries. They too wanted a policy enforcer to ensure the profitability of their investment and benefited from the Funds activities encouraging economically-sound policies which would help protect the long-term via bility of their loans. By the late 1980s and 1990s, the providers of supplementary financing had diversified further to include private investors and other multilateral organizations. It was this change in supplementary financing of borrowing member states, from the U.S. to other states, banks, multilateral organizations and private investors, that provoked the changes in Fund activity. The IMF, therefore, now responds to the demands of creditor states, banks, investors, and other multilateral organizations, rather than just states.86
This is not to say that the IMF acts against state interests. Both powerful donor states and borrowing member states still find it advantageous to help preserve international financial stability and encourage growth and in vestments in developing countries by approving IMF conditionality agreements. Moreover, this argument mainly serves to clarify when to expect state influence to be greatestwhen states are the main sources of supplementary financingand what to expect from state influence. State influence is certainly still apparent in individual cases, but
83
Cohen (1983, 326-7) has a slightly different interpretation. He argues that between 1946 and 1949, the US provided most of the balance of payments financing came from the Marshall Plan and other programs. After the mid-1950s, however, alternative sources of balance of payments financing did not compete with the IMF, if anything they were designed to complement rather than to substitute for IMF credit. Cohen writes that during this period, most sources of alternative financing were only available to the North and were still official rather than private. 84 However, after the debt crisis in the early 1980s, private creditors reduced their exposure and official creditors increased their exposure to the developing world. For instance, Goreaux (1989, 153) states that between 1982-1987, official creditors increased exposure much more than private creditors. 85 Cohen (1983, 315-6) argues that until 1973 balance of payments financing was through official channels, including the Fund, and since then through banks. 86 This shift in financing need not be uni-directional. There have been cycles of public-private financing and public financing may become dominant again.
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states tend to impact the terms of Fund program by lessening, not tightening, Fund conditionality. States have not been the force for increases in the stringency and breadth of Fund conditionality, as state-centric theorists might contend. The argument advanced here clarifies which states are able to influence the terms of a particular conditionality arrangements and why. I am arguing that state influence is not determined by the dynamics within the Executive Board meeting or the percentage of weighted voting power, but by the amount of supplementary financing which that creditor state is pledging in bilateral loans or aid .
Overall the balance of power has shifted, however, so that the content of conditionality agreements now reflects the preferences of supplementary financing principals, as well as general state principals. Instead of responding to the demands of the Executive Board, the Fund now primarily responds to the demands of external financiers, including creditor states, banks, multilateral organizations and private investors. The shift in the content of IMF conditionality arrangements reflects this shift and diversification in external financier principals.
The shift in principalsor in the dominant providers of supplementary, external financingresults in two changes: a change in the type (and preferences) of principals and a change in the number of principals. 87 This dissertation deals primarily with the impact of the change in type. Different types of principals make different demands on the Fund to include certain terms in their Fund conditionality arrangements. States, private financial institutions, and multilateral organizations have different interests in providing financing and therefore different preferences over Fund activities.
C. Principal (External Financier) Interests and Preferences Creditor states, private financial institutions and multilateral organizations provide financing to developing countries for different reasons. Creditor states finance for political ends. Loans, grants and aid are political tools used to support other states or governments. Private financial institutions finance for profit. They make loans to and investments in countries which
87
On the topic of multiple principals, see Maltzman (1997); Maltzman and Smith (1995); Moe (1984), 7689; Pollack (1997); Hammond and Knott (1996); McCubbins, Noll and Weingast (1989); Weingast (1997).
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they expect will yield a positive return. Multilateral organizations finance for policy ends. Loans or grants are made to encourage policy reform or maintenance. This section discusses these interests in more detail and then derives financier preferences over Fund activity from these interests. To assume that international policy is based on political interests is a relatively conventional way of understanding state action. The dominant approaches to understanding state actions and policies in international relations are interest-based and conceive of those interests as political. However, these dominant approaches part company with regard to their ontological assumptions and how they substantively define the political interests of the relevant actors. Scholars from the neorealist and liberal institutionalist traditions have adopted the analytical assumption that states are the primary actors in international politics and are rational and unitary. They consequently assume that states maximize their own interests. This assumption of the state as rational, self-interested actor is one that many scholars have adopted because of its parsimony and power. However, neorealists and liberal institutionalists make different assumptions about state interests themselves. State interests are often substantively defined as survival for neorealists and power or wealth for liberal institutionalist. In other words while neorealists emphasize that states are interested in security and relative gains, liberal institutionalists emphasize economic welfare and absolute gains.88 A third interest-based approach has different ontological assumptions. Domestic politics liberals assume that the main actors are domestic actors (e.g. domestic politici ans) and thus states international actions and policies serve these domestic actors interests. For instance, domestic politicians use state international actions to serve their own interests, often assumed to be re-election/survival or specific policy preferences.89 While their ontological assumptions and substantive definition of interests diverge, neorealists, liberal institutionalist and domestic politics liberals all agree that state international actions are driven by political interests.
88
See for instance Waltz in Keohane: 85; Keohane 1984, especially chapters 5-6; See David Baldwin volume . 89 See for instance, Putnam (1988); Miner (1997); Moravcsik (1997). Milner wrote, No longer are states the actors; rather central decis ion makers, legislatures, and domestic groups become the agents. The state as agent is a casualty of the elimination of the unitary actor assumption. States international actions and policies are affected less by fears of other countries relative gains or cheating than it is by [their] domestic distributional consequences. (Milner 1997: 4, 9)
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For the purposes of this study, I am not interested in overly theorizing the political interests which motivate state international action. My assumption is that the actors are states . Therefore, I consider international action to be motivated by states, rather than domestic politicians, interests. I do not, however, assume a uni-dimensional content of state interests, like survival or wealth. States political interests may be contested and influenced by domestic interest groups and national history, as well as more traditional concerns of size, proximity, power and wealth. This accurate, but not parsimonious, conception of state interests would pose a problem if the theory portended to predict state international action. It does not. Instead, I am interested in state interests for a narrow purpose: to understand why creditor states provide financing to other states and thereby to derive state preferences over Fund activity. The assumption that states finance for political ends simply means that aid or bilateral loans are political, not financial, investments. Political (versus financial) investments are only made in governments or government entities which the creditor state wants to support. Bilateral loans and aid are only given to allies, not to enemies.
The assumption that private financial institutions finance for profit was induced via secondary source materials and interviews with private financiers, but it is hardly surprising. Banks and private investors loan to or invest in developing countries public or private sectors in order to make a profit. Banks serve their profit-minded shareholders. Investors choose investments which they hope will yield better returns than known alternatives, such as interest returns on bank deposits. While banks and private investors have similar interests (profit), they have different pay-off alternatives and time horizons which may result in different preferences over outcomes.
Traditionally, banks make money by extending loans and charging a higher interest rate on that loan than they are paying to depositors.90 When considering whether or not to extend a loan to a potential borrower, banks consider potential benefits (e.g., income earned from loan and interest repayment; future business resulting from establishment/solidification of banker-client
90
In the 1990s, banks are increasingly earning their income from non-lending activities. Adams et. al, 1812. Here I focus on the traditional case which applies to most of the time period under study.
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relationship) and potential risks (e.g., creditworthiness; recoverable assets in the case of default). Bankers are willing to make loans with a reasonable degree of risk because of the potential for gain and because there is supply pressure. Bankers are instructed to maintain a balance between productivity (building loan volume at a reasonable cost to the bank) and quality (ensuring that the loans we make will get paid back as agreed).91 In deciding whether or not to extend a loan to a potential borrower, bankers consider the following three factors, listed in order of importance: the potential borrowers creditworthiness (e.g., both the capacity and the willingness to repay; expected income); lower probability risks and benefits (e.g. reclaimable assets in the case of default, their position in relation to other creditors with respect to collateral security, default clauses, etc.; potential for future business, etc.); and supply concerns (e.g., pressure to make loans from the bank' end).92 After a bank decides to make a loan, it constructs a loan agreement with specific terms, for instance concerning when the payment will be dispensed, when repayment will be received and the price of the loan (including interest and fees). Banks therefore have a medium- to long-term time horizon when considering the profitability of a given loan. If they are solely concerned with the profit from this transaction, then they have a medium-term perspective: the length of the loan itself. If the bank does not consider this loan to be particularly profitable but hopes to initiate a longer-term profitable relationship with this borrower, then their perspective is long-term. 93 Investors also provide financing to the private and public sectors of developing countries in order to make a profit. Investors differ from banks, however, in that their time horizon is often shorter-term. 94 Bond and equity investors often engage in speculative investment and exercise their exit option.
Although this profit motive may seem obvious, others have argued that private financiers international loans and investments reflect their homes countrys political interests,
91 92
Dorfman (1994?). Dorfman (1994?), 10. 93 This is often the case with sovereign loans which are often not very profitable relative to private sector transactions. D interview. Re: banks bargaining leverage with borrowers: Banks have very little bargaining leverage over sovereigns. As the Bank of America credit booklet states, lending to sovereign governments is different. The fact that they dont go bankrupt is simply one aspect of the fact that it is very hard to enforce a loan agreement which they refuse to honor.
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rather than a profit motive. It remains an issue of debate how influential home governments are in deciding which projects, countries or companies receive financing and the terms of that financing. For instance, Ethan Kapstein argued that states are still the most important actor in the global economy and are able to control the activities of banks.95 Banks themselves acknowledge a degree of political influence. For instance in its internal booklet on credit decisions, the Bank of America states that We do not want to make loans for purposes or to customers detrimental to the interests of the United States. However, while banks and investors certainly do not want to lend or investment in projects, companies or countries antithetical to home-country interests, this does not mean that home countries are able to determine who received financing and the terms of that financing. While a small proportion of borrowers or investments may be off-limits because they are detrimental to the home countys interests, within the larger pool of possible investments and borrowers, decisions are made due to profit, not political, calculations. Multilateral organizations finance for policy ends. This assumption was also induced via secondary source materials and interviews. It implies that multilateral organizations are actors unto themselves, not simply empty shells implementing state preferences. Multilateral organizations are interested in certain policy ends and loan in order to encourage the
94
Here I am referring mainly to portfolio investors. Foreign direct investors, whose investments are relatively illiquid, have a much longer time-horizon. Foreign direct investment is not the focus here because it does not generally serve as supplementary financing to Fund loans. 95 Kapstein (1994). Scholars also debate this issue with respect to the pre-World War II period. For instance see Eichengreen and Portes (in Eichengreen and Lindert, 13, 18-19, 39) argued that government did play a role in influencing investors. The British government helped channel lending to the British colonies through the Colonial Stock Acts between the 1970s and 1920s; the Bank of England vetoed some foreign is sues (mainly for foreign governments); the British government was also sometimes involved in default and readjustment negotiations by providing information to the Council of Foreign Bondholders, helping to initiate negotiations and threatening sanctions against defaulters. However, Eichengreen and Portes emphasized that countries rarely impacted the terms of readjustment negotiations and only enforced agreements when politically useful. Krasner emphasizes more active state involvement in ensuring that debts were repaid and also determining the purpose to which the loans were put. (Krasner 1999, 128) Krasner writes, Not just transnational bankers but also state officials have determined which loans should be made and what measures, including the use of force, should be used to compel debtors to honor their obligations. (Krasner 1999, 130) In the 19th century, he argues, that the relationship between private creditors and rulers in their homes countries became more intimate because lending was tied to larger strategic and political objectives, such as cementing international alliances. (Krasner 1999, 132) See also Lindert and Morton, 51) Fishlow, by contrast, argues that most British investments were made largely for profit motives, whereas German and French investments were more politicized. He contrasts marketoriented developmental finance with revenue lending. (Fishlow, 46-56) In the late 1800s, Fishlow argued, the capital market performed its task with virtually no official intervention or restriction.
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implementation or maintenance of these policies. This depiction of multilateral organizations is not inconsistent with the depiction of the International Monetary Fund. The IMF is also motivated by certain policy interests. The Fund provides financing to borrowers in order to encourage certain policies, and responds to the demands of external financiers by changing its programs at the margins in order to increase the likelihood of policy implementation and success. As stated earlier, external financiers exercise leverage over the Fund because they impact what the Fund values most: the success of its programs (policy outcomes) and future bargaining leverage with borrowers (future policy prescriptions).
The dominant multilateral supplementary financier is the World Bank. Of the financing from multilateral organizations that supplements Fund loans, the majority comes from the World Banks International Bank for Reconstruction and Development (IBRD) or International Development Association (IDA). For instance between 1970 and 1995, the World Bank provided between 58 and 81 per cent of public or publicly-guaranteed multilateral debt disbursements.96 Since the World Bank is such a dominant actor in the multilateral external financing landscape, I take the Banks policy interests as representing multilateral supplementary financiers interests at large. The Bank was established, along with the Fund, in 1944 to address the broad issues of reconstruction and development. As stated in a recent World Bank history, From the outset, the Banks subject matter covered a broader span than that of the Fund, and over the decade, it expanded.97 The mandate to address development concerns quickly took center-stage, focusing World Bank interests on poverty alleviation and economic growth, broadly defined to include policy goals related to environmental protection, education impr ovement, healthcare, private business development and institution building, among others.98
(Fishlow, 52) Feis argued that British investments were political instruments. See Spiro and Kapstein for the 1970s period. 96 World Bank. Global Development Finance CD-ROM (1999). These percentages are of IDA PPG debt disbursements and IBRD PPG debt disbursements divided by multilateral PPG debt disbursements. The multilateral PPG series excludes most IMF disbursements which makes this an appropriate metric of supplementary (to the Funds loan) multilateral external financing. See Chapter 2 for a more detailed discussion of this data source. 97 Devesh Kapur, John P. Lewis, and Richard Webb. The World Bank: Its First Half Century. Vol. 1: History. (Washington DC: Brookings Institutions, 1997), p. 2. 98 The World Banks current website states: The Bank uses its financial resources, its highly trained staff, and its extensive knowledge base to individually help each developing country onto a path of stable,
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The three types of external financiers pursue different interests when providing financing to borrowing states. Creditor states finance for political ends. Private financial institutions finance for profit. Multilateral organizations finance for policy ends. The International Monetary Fund serves the interests of external financiers and the recipients of that financing by making the recipients commitments more credible. The IMF acts as a commitment mechanism, facilitating the flow of financing from financiers to developing country recipients. States, private financial institutions and multilateral organizations, with different interests in financing, therefore have different preferences over Fund activity. Their preferences can be deduced from their interests.
As previously stated, creditor states finance for political ends. They are less concerned with being paid back. Aid or bilateral loans are political, not financial, investments. Aid is oftenbut not alwaysgiven to allies and therefore creditor states are often interested in preserving political stability. In practice, that often means that they prefer Fund conditional loan arrangements to be relatively less stringent than the other financiers.99 While creditor states want recipients to agree to certain conditions, they prefer Fund arrangements to allow recipients to maintain some political room for maneuver. In practice, this means that creditor states often prefer Fund conditional loan arrangements that stipulate relatively fewer conditions and include conditions that are less constraining, offering borrowing states more political room for maneuver. In this study, I divide all binding conditions into two groups: targets or procedures. Targets are the less politically constraining group of conditions. They specify only the ends that need to be
sustainable, and equitable growth. The main focus is on helping the poorest people and the poorest countries, but for all its clients the Bank emphasizes the need for: Investing in people, particularly through basic health and education Focusing on social development, inclusion, governance, and institution-building as key elements of poverty reduction Strengthening the ability of the governments to deliver quality services, efficiently and transparently Protecting the environment Supporting and encouraging private business development Promoting reforms to create a stable macroeconomic environm ent, conducive to investment and longterm planning Through its loans, policy advice and technical assistance, the World Bank supports a broad range of programs aimed at reducing poverty and improving living standards in the developing world. http://www.worldbank.org/html/extar/about/glance.htm.
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met (e.g. fiscal deficit or credit target) and allow domestic politicians to choose whichever means are politically feasible. Procedural conditions, by contrast, specify both means and ends (e.g. implementation of a specific social security reform plan) and therefore are more constraining for domestic politicians in borrowing countries. Creditor state interests and preferences generate two predictions: Hypothesis 1: If a country receives relatively more (less) external financing from creditor states, then its Fund loan arrangement should include relatively fewer (more) binding conditions. Hypothesis 2: If a country receives relatively more (less) external financing from creditor states, then its Fund loan arrangement should include relatively more (less) targets versus procedural conditions. Private financial institutions are less concerned with the long-term and with political stability per s. They are interested in economic returns. Banks have a medium- to long-term time horizon; portfolio investors have a short-term time horizon. In practice, this often means three things. Banks prefer Fund conditionality arrangements to include conditions that will increase the probability that they will be paid back. For instance, a certain class of conditions which I have labeled bank-friendly conditions specify that the country has to pay back a commercial bank creditor as a condition of its Fund loan. In other words, this condition makes defaulting on a bank loan more costly for borrowers and thereby increases the likelihood of repayment. Second, banks often prefer Fund conditional loan arrangements to be longer than commercial bank loans, so that the banks repayment is prior to the Funds repayment. Third, both banks and investors want the Fund to provide them with useful information to judge potential borrowers. The Fund has access to private information about borrowing countries policies and their economic situation, in addition to the expertise to evaluate those policies and economic indicators. Therefore, private financial institutions prefer Fund arrangements to include features, such as increased phasing and reviews, which increase the flow of information or clarify the Funds signal. Fund conditional loan arrangements are often divided into tranches or phases; increased phasing means more of these tranches. Reviews are discussions between Fund staff and country representatives pre-scheduled in the original Fund arrangements. Both
99
When states get involved in influencing the terms of Fund conditionality arrangements, they usually push for weaker conditionality than the staff. See Finch (1989); De Gregorio, et. al. (1999).
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phasing and reviews allow the Fund to send signals concerning its present evaluation of the countrys economic situation and policies. Three hypotheses are thus generated from the interests and preferences of private financial institutions: Hypothesis 3: If a country receives relatively more (less) external financing from private financial institutions, then its Fund loan arrangement should include relatively more (less) bankfriendly conditions. Hypothesis 4: If a country receives relatively more (less) external financing from private financial institutions, then its Fund loan arrangement should be rela tively longer (shorter) and/or include relatively longer (shorter) repayment terms. Hypothesis 5: If a country receives relatively more (less) external financing from private financial institutions, then its Fund loan arrangement should include relatively more (less) phasing and reviews. Multilateral organizations finance for policy ends. They deal intensively with the Funds borrowing member states and have specific policy preferences which sometimes differ from the Funds. The main multilateral organization providing external financing for developing countries is the World Bank. The World Bank, for instance, has specific policy preferences regarding development, poverty alleviation, private sector development and institution building (among others), that are not necessarily the same as the Funds traditionally. In practice, this means that multilateral organizations often prefer Fund conditional loan arrangements to include procedural conditionsspecific, detailed directives which specify how policies should be implemented which relate to their specific policy preferences. They also often prefer more conditions whic h address developmental concerns comprehensively from multiple angles. Thus two hypotheses are generated from the interests and preferences of multilateral organizations: Hypothesis 6: If a country receives relatively more (less) external financing from multilateral organizations , then its Fund loan arrangement should include relatively more (less) procedural conditions versus targets. Hypothesis 7: If a country receives relatively more (less) external financing from multilateral organizations , then its Fund loan arrangement should include relatively more (less) binding conditions. Thus, if the dominant source of state financing shifts from states to banks to multilateral organizations, the instructions which the IMF will receive on appropriate activity and the content of its conditionality arrangements will change in turn. Whereas a state may instruct the IMF to
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negotiate a conditionality arrangement with some general targets for credit expansion but few procedural reforms which may upset political stability, a private financier may prefer an arrangement with more bank-friendly conditions, phasing and reviews, and a multilateral organization may prefer a program with numerous conditions, particularly procedural conditions, to address issues of development and poverty alleviation comprehensively.
Changes in the IMF activity and IMF conditionality have been driven by a shift in the sources of state financing. The IMF is effectively governed by the sources of state financing, whether they be creditor states, other multilateral organizations, or private financial institutions. This argument offers predictions which directly contradict the dominant state-centric alternatives. Realists and conventional neoliberals look to states as the impetus for change in international organizational activity. International organizations serve state interests and so a shift in IO activity would come from shifting demands from states, due perhaps to a shift in the distribution of power for realists or a shift in the functional environment for neoliberals. For both, states would be the ones therefore demanding increasing stringent and specific Fund conditionality arrangements from the International Monetary Fund. By contrast, I am arguing that the influence of states is to depress conditionality; private financial institutions and multilateral organizations have been the main forces of change, demanding new, increasingly stringent terms.
D. The IMFs Unique Role

How is it that the International Monetary Fund facilitates exchange, particularly financing, between debtor states and supplementary financiers? The first section introduced the idea that the Fund facilitates mutually-beneficial exchange between borrowing states and sources of state financing. The second section discussed the central logic behind the argument: that sources of state financing are the most relevant principals governing the International Monetary Fund, that they have different preferences over Fund activities, and that they have changed over time, hence driving changes in Fund activities. This section focuses on the Funds role in the international system and how, with its twin assets of expertise and resources, it helps facilitate mutually beneficia l exchange between debtor states and various sources of state financing.
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Creditors and debtors face a dilemma, like many partners in exchange. While both may benefit from a loan, the debtors short run temptation to renege, by allocating the loan according to short-term political gain and risking loan default, may deter the creditor from ever extending it. 100 The debtor, especially a sovereign debtor, has a very difficult time credibly committing to handle the loan responsibly and pay it back. 101 This inability to credibly commit, to a course of cooperative behavior or even to credibly communicate policy preferences to an adversary, is a generic, but major impediment to cooperation in international relations. Credible commitments are important both to increase certainty of preferences or types, and also to increase cooperation by limiting the perverse consequences of maximizing behavior.102 International institutions and organizations can help actors overcome this barrier to cooperation by making actors commitments more credible.
For instance one well-known international institution helped actors overcome the problem of credible commitments and facilitated mutually-beneficial exchange in a much different context: the law merchant in medieval Europe, a decentralized system of judges that provided information about various merchants and effectively testified to their good (or bad) reputations. 103 The IMF also facilitates international loans and state financing by testifying to the good (or bad) reputations of particular state governments. IMF conditionality provides information about the sovereign borrower, including whether the IMF considers their economic policies viable to remedy their payments imbalance and pay back their debts. The IMF revives
100 101
Milgrom, North and Weingast (1990). Root (1989). 102 Shepsle (1991, 246) argues that Discretion is the enemy of optimality, commitment its ally. He distinguishes between commitments being credible in the motivational sense, in other words that the individual has an incentive to stay the course, and in the imperative sense, in other words alternative action or reneging is prevented, perhaps coercively. Shepsle (1991, 247) writes that a commitment is motivationally credible because it is incentive-compatible, and hence self-enforcing. In the imperative sense, he distinguishes between institutional rules that disable discretion, by somehow not allowing the actor to make the choice that would enable her to renege, and exogenous coercion. A rich literature has grown which explains certain domestic institutional developments as solutions to the problem of credibly committing, often contributing to economic development. See for example North and Thomas (1973); Weingast (1995); North and Weingast (1989); Root (1989). 103 Milgrom, North and Weingast (1990, 3) argue that the role of judges in the system, far from being substitutes for the reputation mechanism, is to make the reputation system more effective as a means of promoting honest trade.
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and improves the efficacy of the reputation mechanism in a system with incomplete information, in which creditors may not be able to fully assess the reliability of the current government. 104 Thus the IMF, through IMF conditionality, facilitates cooperation between creditors and debtors by vouching for a borrowing countrys reputation and enabling it to more credibly commit to a particular course of action. 105
The International Monetary Fund is uniquely positioned to assist borrowing countries in overcoming their commitment problems and thereby facilitate international financing flows because of its expertise and resources. Fund power lies at the link between expertise and resources, between the social and the material. Both elements are key for the Funds relationships with both borrowing member states and supplementary financiers. The unique combination of these two assets allows the Fund to fill an important void and allow lenders and borrowers to attain objectives that would otherwise be unattainable.106 In this section, I discuss how both expertise and resources figure prominently in borrowing states decision to rely on the Fund, in supplementary financiers decision to rely on the Fund, and in shifting borrowing states incentives so that their commitments are more credible. These three issues are obviously intertwined, but I discuss them separately for clarity.
Borrowing member states accept IMF conditionality for both the IMFs expertise and the resources that it receives from both the Fund and supplementary when it agrees to (and implements) a Fund program. Its expertise confers a certain amount of legitimacy on the borrowing country and its policies, and acceptance of this expert advice is often a ticket to Fund and supplementary financing. The expertise and resource elements are inextricably linked. Figure 1 demonstrates the counterfactual: if borrowing states turned to the Fund for resources, but not expertise, or for expertise, but not resources. If the borrowing member state wanted
104 105
Milgrom, North and Weingast (1989), 808. Lipson (1986, p. 221, 231-2) makes a related argument that the IMF has adapted to a new role of helping banks overcome collective action problems inherent in debt reschedulings. The Fund helps provide a focal point so that the banks can agree on the terms and commitments of a restructuring package. The IMF also ensures the loans of banks by monitoring and enforcing stabilization or structural adjustment policies. The IMFs role is focused on international debt. 106 Keohane (1984), p. 91, ch. 6.
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resources, but not the Funds expertise, then it would turn to another non-conditional financing source. The Fund only allows a relatively small amount of financing to be drawn without conditionality, under normal circumstances about one quarter of a countrys quota. Therefore, if a country needs more financing than that and wants it to be unconditional, they turn to another non-conditional financing source, like a bilateral lender or a bank.107 If a borrowing state wanted Fund expertise but not for the purposes of securing Fund resources, it would seek IMF advice through Article IV consultations, a letter of approval from the Managing Director or some adviceonly function, rather than a conditional loan arrangement. Therefore, when states enter into a Fund conditional loan arrangement, they seek both Fund expertise and resources. Figure 1: Why a borrowing state relies on the Fund for both expertise and resources.
If they want
No Expertise Expertise No Resources 1. N/A 3. IMF advice-only outlets, e.g. Article IV consultations, technical assistance Resources 2. Supplementary financiers (e.g. banks or bilateral lenders) 4. IMF conditionality
Cells 2 and 3 are often not viable options. External financiers or the Fund often require both (cell 4) or none (cell 1); therefore, borrowing states wanting the benefit of resources or Fund expertise are forced out of cells 2 and 3 and into cell 4. For instance, often banks or bilateral lenders will not agree to lend without an experts stamp on the countrys polic y program. Therefore, cell 2 is not an option. Countries may then attempt to move to cell 3, and receive the Funds expert stamp in order to secure this outside financing, without receiving Fund resources and submitting to the stringency of Fund conditionality. While the Fund continues to have many advice-only outlets, including for instance Article IV consultations, the Fund has refused to give its formal seal of approval without the stringency of conditionality. In other words, there are no catalytic benefits of Fund expertise without it being linked to Fund resources. Cell 2 is
107
I view Fund and supplementary financing as complementary, not substitutes. Bird (1995) has argued that they are substitutes for most under-developed countries. However, his evidence seems to point otherwise, that the Fund and private flows are comp lements for all countries except African ones. Moreover, in the case of Africa, IMF flows are merged with other official flows which obscures the possibility of IMF and other bilateral flows being complements.
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therefore also not an option, when the country wants to use Fund expertise to gain credibility and help secure non-Fund financing. 108
For instance during the early 1970s, the Fund staff discussed the option of issuing formal certificates which would indicate the Funds approval of a countrys policy programin other words expertise, not linked to Fund resources. The certificate was proposed because many of the recent conditionality arrangements had become symbolic, in that states did not actually need access to Fund resources, only to Fund advice. 109 Banks and bilateral lenders often demanded that an IMF arrangement be in place before they would grant a loan or aid package. The staff dubbed conditionality arrangements symbolic when countries had no intent to borrow from the Fund but were instead utilizing Fund expertise for the purposes of securing these non-Fund resources. As Sir Joseph Gold wrote in proposing the idea of the certificate: Over the past years, there have been cases in which members have requested and received stand-by [conditionality] arrangements for reasons other than the need for financial assistance from the Fund. The reasons that prompted the request for the standby arrangement [included]the desire to convince foreign creditors of the creditworthiness of the member and its ability to repay its indebtedness.110 A borrowing country turns to the IMF and accepts its increasingly stringent conditionality both because the advice is expert and legitimate, and because it helps them secure financing from the Fund and outside sources. Borrowing states rely on the Fund to help them overcome their commitment problems because of both its expertise and the resources which its expertise yields.
Supplementary financiers also rely on the Fund for both its expertise and resources. The Funds expert judgement lends justification to their investment and Fund resources make Fund judgements more credible and insured. Both the Funds expertise and its resources lend credence to borrowing countries claims of creditworthiness.111 Supplementary financiers rely on the Funds expert judgement of countries policies and creditworthiness for five related reasons.
108
Cell 3 is an option when the country truly only wants Fund advice, and no financing. However usually Fund advice is linked in some way to the securing of financing. 109 International Monetary Fund archives. S 1760 1970-1975. 110 Gold made the initial proposal in a memo to the Managing Director on December 3, 1970. (S 1760 1970-1975)
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First, IMF judgement is respected; it represents received economic wisdom and is valued for all of the standard reasons why we defer to experts. Second, the IMF staff have access, by virtue of their expertise and especially their independence, to confidential and valuable economic and political information. 112 Third, IMF staff are able to monitor a countrys adherence to the stabilization program because of its status as an independent expert; the Fund increasingly reports the monitoring results publicly. For these three reasons, the IMFs judgements regarding country policies should be more accurate and informed than the judgements of staff economists from banks or individual creditor countries, and IMF conditionality should be more effective than conditionality imposed by supplementary financiers alone. In fact, banks have attempted to impose conditionality without the assistance of the Fund, for instance in Peru in 1976, unsuccessfully. As Benjamin J. Cohen has written, banks, as private institutions, simply did not have the legal or political leverage to dictate policy directly to a sovereign government.113
Could the Funds judgements be biased in favor of borrowing member states due to the Funds own interest in supporting successful programs and seeing these countries economies improve? IMF resources make Fund judgements more credible and therefore provide the fourth and fifth reasons why supplementary financiers rely on Fund expertise. Fourth, when the Fund lends money, credence is lent to its evaluation of borrowing countries policies. This was clear to the Fund staff during the early 1970s debate over certificates mentioned above and was one of the reasons why the staff decided not to begin issuing certificates as formal approvals of countries policy programs. They were afraid that the Funds standards would weaken and the certificates, and perhaps Fund expertise, would become meaningless. In 1970, Richard Goode argued that: If this is accepted, the value to the member of a certificate seems severely limited. Creditors might be willing to accept the certificate as a significant commendation of past policies and intentions, but would come to recognize that it carried no assurance about the observance of good intentions or the Funds willingness to provide financial resources.114
111 112
Cohen (1983) makes a similar point. Gold (1982), 13. 113 Cohen (1983), 332; Lipson (1981), 623. 114 S1760, 1970-1975, Memo from Richard Goode to the Managing Director re: Symbolic Stand-by Arrangements, December, 17, 1970.
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Ernest Sturc similarly wrote that Absence of direct connection between a certificate and possible use of Funds resources would, however, make it very difficult to maintain standards for the certificate, which is necessary if the Funds effectiveness is to be maintained.115 When the Fund puts its money where its mouth is, so to speak, its judgements are more credible. Finally the fifth reason why supplementary financiers rely on Fund judgements and expertise, as conveyed by a conditionality program, is that Fund resources provide supplementary financiers with extra insurance if the Funds judgements are wrong. Fund resources could be used to pay back bilateral or commercial bank creditors. 116
Supplementary financiers rely on the Fund because of both its resources and its expertise. The link is crucial. The Funds expert judgement makes a countrys policy commitments more credible and thereby allows the creditors to better assess a countrys creditworthiness. However, the credibility of the Funds expert judgement itself is not only a function of the staffs professional training, but also the Funds resources which back it. The supplementary financier responds to IMF conditionality by providing additional credit or aid or by recycling existing debt because the Funds expertise and its resources provide the financier with extra assurance that its loan will go to good use. Thus the Funds expertise and resources are a source of power for the Fund in its dealing with both supplementary financiers and borrowing member states.
Fund conditionality enables the borrowing country to commit more credibly to repaying its loans by shifting its incentives to implement economically sound policies. The Fund devises a stabilization program of policies which it believes will allow the country to stabilize, grow and pay off its debts. While adherence to these programs is notoriously uneven, Fund monitoring and the linking of both its resources and the supplementary financing to certain binding conditions do shift the governments incentives so that adherence is more likely. IMF conditionality arrangements often involve three different mechanisms to shift states incentives and allow them to credibly commit to certain policy actions. First, the IMF increasingly requires the countries to
115
Memo to Acting Managing Director, December 15, 1970.
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implement certain policies or meet certain targets before they receive the first installment of their loan. These preconditions function as sunk costs, costs which are incurred ex ante in order for commitments to be more credible. Second, IMF loans and credit from certain supplementary financiers, including most commercial banks, are tied to the country meeting its binding conditions. The loans are often split into separate tranches and each tranche is conditioned on the meeting of certain targets. Thus, borrowing states hands are tied, in that costs will be suffered ex post if they defect from the agreed-upon policy program. 117 Finally, IMF conditionality allows the IMF to monitor borrowing country policies in detail and publicize transgressions, thereby reviving the reputation mechanism.
Neither source of the Funds powerneither its expertise, nor its resourcesis fully independent. The Funds resources come from two sources. First states, either through the regular quota system or through various arrangements to borrow from states, provide the revolving pool of resources which the IMF loans to member states in balance of payments crises. Second, supplementary financingfrom states, private financial interest or other multilateral organizations that decide to invest in or lend to a country with a Fund programis also a source of Fund power. The fact that the Funds program causes, often ensures, an inflow of external financing is a source of leverage for the Fund. 118 Moreover, as discussed earlier, this inflow of external financing is not necessarily an automatic reaction to a Fund program. Often the Fund is actively involved in securing external financing for a borrowing member state and sometimes requires that this external financing be lined up before the approval of the Fund conditionality agreement.119
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The Fund has been criticized as having bailed out commercial banks in this way. Critics have claimed that positive net transfers from the Fund have financed negative net transfers to banks. The Fund has rejected this claim, e.g. Nowzad (1989), 120. 117 Fearon (1997). The tying hands cost is more uncertain since binding conditions are sometimes renegotiated if they can not be met. 118 Lipson (1986). This fact is disputed in Bird (1995), but his metric of capital inflow does not include debt-reschedulings, roll-over and bilateral and multilateral sourcesneed to check this. 119 See Einhorn (1979) for an early empirical study of this regarding SAF and ESAF programs. Also see Polak (1991, 58) which describes the Fund formally securing capital for borrowing countries. Schadler et. al. (1995, 14) also describe securing external financing as one of the three central elements of a Fund program. (same as footnote #72)
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Sociologists conceive of expertise as a source of independence and power.120 However, even the Funds expertise is not independent. It is influenceable or corruptible by the borrowing member states and supplementary financiers. It is obvious that borrowing member states, who have more information about their particular political situation and the feasibility of certain political reforms or economic goals, may be able to sway the Fund staff on elements of the conditionality program. Supplementary financiers are also able to influence the terms of Fund conditionality arrangements because of their implicit (or explicit) threat to withhold supplementary financing to the borrowing state and doom the Funds stabilization program.
This is a different conception of the IMF than the front for state power conceived by realists and neoliberal institutionalists, the ideational, expert power conceived by sociologists, or the pawn of domestic politicians from domestic politics theory.121 While the IMF was created by states and initially endowed by states, the Funds power is no longer necessarily derived from states, as state-centric theorists would argue. Moreover, the IMFs power is not due to the expert character of its advice alone, as sociologists argue. The source of IMF power is its expertise and resources, and particularly the link between the twohow its expert stamp ensures a flow of supplementary financing. The IMF is able to exercise control over domestic policies of borrowing countries because its expert advice is linked to material rewards, because of the power of its pronouncements.
In sum, the basic argument that I am advancing is that changes in Fund activity have been driven by changes in the sources of state financing, in particular the increase in financing from private financial interests and multilateral organizations in relation to financing from creditor states. The next section details how I plan to test this argument and what types of evidence I bring to bear on this question.
120 121
See Barnett and Finnemore (1999) Barnett and Finnemore (1999).
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IV. Data and Methods In order to test the external financier argument against the three alternative arguments, this study employs both quantitative and qualitative, large-N and case study evidence. In this section, I briefly discuss the research design of this project.
This chapter has introduced four competing arguments to explain changes in Fund activity. The realist argument is that changes in Fund activity have been proximately driven by a change in powerful state preferences or a change in the distribution of power. The bureaucratic or sociological argument is that changes in Fund activity have been driven by the Fund staff, either by their devel opment of intellectual, causal models or through their trial -and-error attempt to design successful programs. The domestic politics argument is that changes in Fund activity have been driven by changes in borrower state preferences or demands. The external financier argument is that changes in Fund activity have been driven by changes in the sources of state financing, in particular the increase in financing from private financial institutions and multilateral organizations in relation to financing from creditor states.
In the chapters that follow, I conduct various tests to attempt assess the explanatory power of the external financier argument in relation to the alternative arguments. I utilize four general types of evidence: an originally-constructed data set of 249 conditional loan arrangements from twenty representative countries between 1952 and 1995; interview evidence from interviews conducted by the author with Executive Directors, Fund staff, state officials and commercial bankers; primary source material from the Fund archives; and various secondary source material.
Chapter 2, The Independent Variable: Changes in the External Financing of Developing Countries, discusses the key independent variable in more detail. First, it discusses the economic concepts used and data sources available to unpack the external financing of developing countries in the post-World War II period. Then it briefly reviews how the external financing of states functioned before World War II. Finally, it broadly details the post-World War II changes in the external financing of developing countries. This chapter establishes that
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there have been important changes with regard to who is providing the external financing, how much they are providing relatively, what sorts of financial instruments they are using, and who is receiving this financing.
Chapter 3, The Dependent Variable: Changes in the Activities of the International Monetary Fund, discusses the empirical puzzle which is the focus of this study. First, it defends the use of Fund conditionality as a proxy for broader changes in Fund activity. Then it recounts the history of changes in Fund conditionality and the policies with respect to the use of Fund resources from 1944 until today, using both primary and secondary historical material. Finally, the data set of Fund conditional loan arrangements constructed for this project is introduced and descriptive statistics regarding specific changes in Fund conditionalityfor instance, the change in the average number of binding conditions, the types of conditions, and the length of the arrangementsare presented.
Chapter 4, Observable Implications and Illustrations, demonstrates the plausibility of the central argument. First, it reviews the three alternative arguments and their observable implications. Then, utilizing archival, interview and secondary source evidence, it assesses these three alternative arguments by evaluating key observable implications. Support for key implications of these arguments is weak, casting doubt on each of the three alternative explanations. States, including the United States, appear to have opposed ex ante many of the key changes in Fund activity that have been subsequently observed. Evidence regarding program convergence and divergence, and staff opposition to certain changes in Fund conditionality weaken the bureaucratic argument. Moreover, evidence regarding program uniformity and the process of constructing Fund programs suggests that domestic political interests from borrowing states may not have been the driving force behind changes in Fund conditionality. Finally, this chapter offers initial illustrations of the relationship between the Fund and supplementary financiers and the potential mechanisms of influence.
Chapter 5, Statistic al Testing, offers more systematic tests of the four competing arguments. I conduct both longitudinal and time-series cross-sectional tests of my central
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hypothesis: that the more financing a country receives from a particular type of financier (states, private financial institutions or multilateral organizations), the more likely it is to have a Fund loan agreement with conditions that this financier prefers (hypotheses 1-7). In both analyses I use the data set constructed for this project. In the longitudinal analysis, I use year averages as the case and test whether conditions which states, private financial institutions or multilateral organizations prefer appear to increase when financing from states, private financial institutions, or multilateral organizations, respectively, appears or increases, holding other variables constant. Next, I conduct cross-sectional statistical tests of my argument against alternatives. For individual countries, holding other variables constant, if you increase their relative financing from a particular supplementary financier, are you more likely to observe conditions which that financier prefers? (Hypotheses 1-7) For this set of tests, I use country-loan-years as my cases and control for individual country-level economic and political variables, as well as a U.S. interest proxy.
Chapter 6, Tracing Causality: Case Studies, unpacks the mechanisms of causality by focusing on three small case-studies. The case studies are drawn from the country cases which comprise my data set. I focus on Argentina, Ghana and Turkey. For these three country cases, I trace how their Fund conditional loan arrangement changed over time in light of their specific political and economic circumstances and the external financing commitments they received that year. Details of individual arrangement negotiations are analyzed and discussed, paying particular attention t negotiations preceding arrangements which marked a sharp increase in conditionality from the prior arrangements.
In the final chapter, I review the central findings of the thesis and discuss how these findings relate both to the current debate on the appropriateness of Fund activity and to the general literature on international organizations. I conclude with suggestions for future research.

Erica R. Gould - IMF

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Erica R.

Gould Chapter 1e, 3-24-01

United States IFIAC (2000).

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The academic literature on the IMF is surprisingly spare. Thacker (1999).

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e.g., Przeworski (1991?).

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D. The IMFs Unique Role

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Memo to Acting Managing Director, December 15, 1970.

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See Barnett and Finnemore (1999) Barnett and Finnemore (1999).

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