Political Economy Influences Within the Life-Cycle of IMF Programmes

POLITICAL ECONOMY INFLUENCES OF IMF PROGRAMMES 1255

© Blackwell Publishing Ltd 2003© Blackwell Publishing Ltd 2003, 9600 Garsington Road, Oxford, OX4 2DQ, UK

and 350 Main Street, Malden, MA 02148, USA 1255

Political Economy Influences

Within the Life-Cycle of IMF

Programmes

Graham Bird and Dane Rowlands

1. INTRODUCTION

OR an institution that is ultimately governed by politicians through its Board

of Governors and makes loans and gives policy advice to governments, the

political dimensions of the International Monetary Fund’s operations have, for a

long time, received relatively scant attention by comparison with that paid to the

economics of IMF conditionality. Even where politics has been addressed, it has

often been tacked on as an amorphous residual rather than being examined in a

methodical and direct fashion. Early attempts to explain IMF lending purely in

terms of economic variables suggested that there was a missing political com-

ponent that affected countries’ willingness to turn to the Fund, but did not pursue

the issue. For example, in an early study Bird and Orme (1981) find that their

economic model over-predicts drawings and conclude that ‘drawings are not a

purely economic phenomenon and other political, social and institutional factors

need to be taken into account before a satisfactory explanation may be given’.

But they do not specify what these are. More recently Bird (1995) again con-

cluded that ‘the remaining challenge is to explain the residual variation which is

left unexplained by economic characteristics’. Domestic political instability was

also sometimes loosely attributed to IMF programmes without much attention

being paid to the causal connections.

At the time of the Third World debt crisis in the 1980s some observers

began to suggest forcefully that the Fund’s lending decisions were being influ-

enced by the special interests of major shareholders rather than by economic

judgement alone, but again, the nature and extent of this political influence was

GRAHAM BIRD is from the Surrey Centre for International Economic Studies, University ofSurrey, Guildford. DANE ROWLANDS is from the Norman Paterson School of InternationalAffairs, Carleton University, Ottawa, Canada.

F

1256 GRAHAM BIRD AND DANE ROWLANDS

© Blackwell Publishing Ltd 2003

not examined in detail (Finch, 1989). The same theme has recurred with increas-

ing regularity and constituted an important element in the Meltzer Commission’s

criticisms of the Fund’s operations (IFIAC, 2000).

Meanwhile, the IMF sought to explain the frequent failure of governments to

fully implement programmes as reflecting their lack of political commitment, but

at the same time seemingly made no attempt to analyse the factors that might

determine this.

Things have begun to change. There is an emerging literature that focuses

much more directly on the political aspects of the IMF. Economists have begun

to take political factors into account and political scientists have themselves

begun to examine the political dimensions of the Fund’s operations. Although not

yet offering comprehensive coverage, the literature is beginning to provide more

detailed analysis of many key issues. Broadly speaking these fall into two categor-

ies. The first examines the politics of interaction between the IMF and its client

countries. Why do some countries turn to the Fund for assistance while others do

not; why might the Fund be more or less prepared to lend and under what terms;

why might the Fund respond differently to countries whose programmes break

down? The second category examines institutional aspects of the Fund. Which

member countries exert the strongest influence; are the interests of other coun-

tries adequately represented; to what extent is the Fund reasonably democratic;

how are decisions made; is the Fund run by politicians via the Executive Board

or by its own staff or management? With increasing attention being paid to so-

called ‘globalisation’, or international economic integration, the role of the Fund

in governing globalisation as well as its own governance has also become a focus

for discussion.

Increasing interest in the political economy of the IMF has coincided with a

broader debate about the future of the Fund. A series of reports has been pro-

duced discussing the international financial architecture and the future role of the

international financial institutions and in particular the IMF.1

But to accurately assess the Fund’s future it is necessary to fully understand its

current activities. It is in this context that the recent attention to the political

economy of the Fund is to be welcomed. But where do we stand? What insights

have been provided? What more do we need to investigate? This paper addresses

these questions. Its purpose is modest. It does not seek to provide new research

findings. Instead its claim to originality lies in attempting to offer a reasonably

systematic analysis of where politics may influence the Fund’s operations and to

draw on existing research to give insights into the issues raised. The conceptual

framework is that of the ‘life cycle’ of an IMF-supported programme from

1 See, for example, the Council on Foreign Relations (1999) and the International Financial Institu-tion Advisory Commission (IFIAC, 2000). These are usefully summarised in Williamson (2001)and Bird (2001c).



conception to mortality. How does politics encroach into the various stages of the

life cycle? Towards the end of the paper there is some discussion of governance

issues relating to the IMF.

2. THE LIFE CYCLE OF AN IMF PROGRAMME: WHERE DOES POLITICS COME IN?

a. The Decision to Turn to the Fund

Turning to the IMF for financial assistance is a political decision. It is a

decision made by governments. Not all governments facing similar economic

circumstances will make the same choice. However, for an IMF programme to be

agreed not only does the government in question have to apply to the Fund, but

also the Fund must agree to the loan. There is therefore both a demand and

supply side to any arrangement involving the Fund. Potentially politics can influ-

ence both sides. In practice what we observe distinguishes only between those

countries where an arrangement is made and those where it is not. We only see

the outcome and it is difficult to isolate the demand and supply side factors that

affect it.

Studies of arrangements with the IMF have, however, clarified the economic

circumstances under which countries borrow from the Fund (Conway, 1994;

Killick, 1995a; Knight and Santaella, 1994; and Bird, 1996a). Fundamentally

there has to be a balance of payments need. But behind this, there may be a com-

bination of macroeconomic mismanagement, in part reflected by fiscal deficits,

monetary expansion, inflation, currency overvaluation and international reserve

depletion, and external shocks in the form of adverse terms of trade move-

ments or movements in world interest rates and even natural disasters. More

recently, events in East Asia in 1997/98 have shown how a balance of payments

need may be linked to the capital account as well as the current account. Here it

was the reversal of capital flows, previously used not only to finance modest

current account deficits but also to accumulate international reserves, that gave

rise to a proximate balance of payments crisis that necessitated the involvement

of the IMF. With economic difficulties connected either to the current or the

capital account, foreign exchange will be in short supply and will carry a high

shadow price. In circumstances where private international capital markets are

unwilling to lend, the IMF may be the lender of last or only resort. The conven-

tional view is that governments will reluctantly cede some control over economic

policy to the IMF in order to secure its financial support.

From a government’s perspective there will be a cost to borrowing from the

Fund not so much in terms of the rate of interest on loans, which is likely to be

well below the market rate at which the country could borrow commercially

(even if it had access to private capital at any price) but perhaps more in terms of



the loss of control over the design of economic policy. The cost is the conditionality

attached to Fund loans. How large will this cost be? There are two elements to it.

The first relates to the discrepancy between the policy preferences of the govern-

ment and those of the Fund. The larger the discrepancy the larger the cost. Of

course, in the midst of a balance of payments crisis the priorities of governments

and the Fund may correlate more closely, with governments attaching greater

importance to reducing current account deficits. At other times governments may

be tempted to view the balance of payments as a non-binding constraint on their

ability to achieve objectives of economic growth and development. Even at times

of crisis there may still remain significant differences between the preferences of

governments and the Fund, not least because governments are faced with the

political repercussions of the programmes that are implemented.

There are other reasons, however, why it might be expected that even where

there is agreement on objectives there will be disagreement on the policies through

which these objectives may be achieved. Governments and the Fund have differ-

ent constituencies to serve. In connection with this, governments will have a keen

interest in the income redistributive effects of alternative policies and will be

concerned about the distribution of the costs and benefits of policies as well as

their time profile. In short, the politics of adjustment will be more important to

governments than to the Fund.2

But even if there were to be little disagreement over the details of policy, some

governments may still view the overt loss of policy independence as a cost of

conditionality. Countries may place a positive value on retaining national sover-

eignty over the design of economic policy. Interesting in this regard is that

elsewhere the authors here found evidence that regional powers, Brazil in the

case of Latin America and Nigeria in the case of Africa, have sometimes resisted

the temptation to borrow from the IMF when their economic circumstances

apparently warranted an arrangement (Bird and Rowlands, 2001b). For other,

perhaps smaller countries, national sovereignty over policy design may be less

staunchly protected. Some African finance ministers have reported in confidence

to one of the authors that they have become resigned to the fact that they have to

accept whatever conditionality the Fund favours.

It follows that two countries, equally constrained in terms of foreign exchange,

may make different decisions about involving the IMF. Although the benefits

may be similar, the costs may vary. A government that is more strongly opposed

to Fund-favoured policies and which values national sovereignty more highly is

less likely to turn to the Fund.

Leading on from this, another constraint on a country turning to the Fund may

be the existence of a political threshold. The probability of turning to the Fund

2 The Fund will, however, be concerned about the income redistributive effects of programmes tothe extent that these will influence implementation.



for assistance depends on which side of the threshold the country is. The political

cost of involving the Fund may be ‘fixed’. Once incurred it will not affect near-

term subsequent decisions. Evidence on the repeat use of Fund resources is

consistent with this idea; although not only just this idea. Many studies have

shown that the existence of a current programme with the Fund depends signific-

antly and positively upon whether there has been a recent past programme

(Conway, 1994; Knight and Santaella, 1994; and Bird, Hussain and Joyce, 2000).

A government’s willingness to turn to the Fund may also be influenced by the

stage of the political and electoral cycle. Seeking assistance from the Fund is in

many respects a ‘badge of failure’. Governments will, in general, be reluctant to

pin it on.3

They may, however, be less reluctant early in their administration. Where

there has been a change of government they may still be able credibly to blame

the previous administration. Where there has been no change of government they

may still be able to take advantage of a post-election honeymoon period. In any

event, by turning to the Fund early in the electoral cycle the time lapse before the

next election will be maximised and with this the electoral costs minimised.

What does the available evidence suggest about these political influences over

a government’s decision to turn to the Fund? There is little of it upon which to

draw and what there is may be interpreted in different ways. Extreme caution is

therefore needed. Having said this, in a detailed modelling exercise of IMF

lending, the authors have elsewhere found a general tendency for the probability

of a Fund arrangement to decline where there is an incumbent ‘socialist’ govern-

ment (Bird and Rowlands, 2001a). This could reflect governmental opposition to

the policies of economic liberalisation favoured by the Fund and the Fund’s

views about the role of the state. In another paper, the authors also identify

individual cases – Ghana in 1983 and 1984 and Nepal in 1992 – where a change

in the political leanings of the government in power away from ‘the left’ heralded

the negotiation of IMF programmes (Bird and Rowlands, 2001b).

In a comprehensive examination of the dealings of transition economies with

the IMF during the 1990s involving both econometric investigation and case

study work, Stone (2002) also finds support for the claim that the political lean-

ings of the government on a left-right spectrum exert a significant effect on the

probability that an arrangement with the Fund will be made. He also claims that

the evidence confirms that proximate elections discourage governments from

turning to the Fund. This is consistent with the above analysis.

However, it would be unwise to read too much into this evidence. The fact

that, in general, socialist governments are less likely to have programmes with

the Fund could reflect a reluctance on the part of the Fund to provide support

3 However, the reputation of individual members of the government or key officials may beenhanced by successfully negotiating a programme with the IMF.



rather than a reluctance by socialist governments to seek it. Moreover, the Fund

has lent heavily over the years to left-leaning governments such as that of Michael

Manley in Jamaica. Bird, Hussain and Joyce (2000), in a study of the prolonged

and repeat use of IMF resources by some countries, find that Fund lending is

significantly and negatively associated with the size of government consumption

contradicting the characterisation of borrowers as profligate spenders and imply-

ing again perhaps that governments favouring a large role for the state are dis-

inclined to turn to the Fund. While Dreher and Vaubel (2000) find that IMF credits

to the ‘more democratic recipient countries’ are larger in post-election years,

lending support to the idea that the political costs of involving the Fund are lower

at this point in the electoral cycle, they also discover that credits are also higher

in pre-election years as well. They suggest, in the latter case, that incumbent

governments, apparently confident of re-election, may be seeking to use the Fund

as a scapegoat for unpopular policies after the election.

But will IMF conditionality always be viewed by governments as a cost?

Could it also perhaps be seen as a benefit? Unified governments may be tempted

to use IMF programmes as a way of seeking to overcome the time consistency

problem where their commitment to policy reform would lack credibility outside

the auspices of the Fund. Do governments turn to the IMF in an attempt to import

the superior reputation of the IMF for economic management? Are they trying

to improve the credibility of policy reform by tying themselves into a Fund-

supported programme, the signing of which signals a commitment to reform? This

of course raises the question of whether IMF programmes themselves carry cred-

ibility, an issue to which we return later (Bird, 2002a). However, it may be unrealistic

to view governments as being unified. They may be fragmented and represent

fragile coalitions. This creates the possibility that one part of the government

may seek to involve the IMF in order to strengthen its hand. Fund involvement

may be sought in order to ‘tip the balance’ in favour of economic reform. Here

it may be expected that finance ministries will align more closely with the policy

preferences of the IMF than will spending ministries which fear the implied cuts

in government expenditure. The need to pursue policies which receive the Fund’s

endorsement may be used as an argument both within government, and by gov-

ernment in defending its policies against criticism from outside. Indeed, where

a government knows that the kind of policies favoured by the Fund will be

unpopular domestically it may be tempted to use the IMF as a ‘scapegoat’. It

may seek to shift the blame for contractionary fiscal and monetary policies and

devaluation onto the Fund.

How common are the ‘tipping the balance’ or ‘scapegoat’ explanations of IMF

borrowing? While there is a broad consensus that they may be relevant in indi-

vidual cases, there is disagreement about whether they are systematically signifi-

cant. Vreeland (1999) argues that they are. He presents aggregate evidence that

leads him to conclude that many countries turning to the Fund do not need



foreign exchange and he goes on to claim that this is consistent with the scape-

goat explanation. However, other studies which focus on the significance of

decumulating international reserves and the general conditions of economic dis-

tress that prevail when countries turn to the Fund suggest otherwise. Similarly in

a detailed study of seventeen individual country cases Killick (1998) concludes

that ‘no systematic evidence is available’ in support of either the tipping the

balance or the scapegoat roles of IMF conditionality. This is consistent with the

findings of earlier work by Nelson (1990), Kahler (1992) and others. Killick also

concludes that:

while scapegoating can be politically useful to pro-reform governments in particularsituations . . . it is also a tactic apt to back-fire because it creates an image of weak governmentknuckling under to outside pressure, thus eroding its domestic support and providing the oppo-sition with a stick with which to beat it (Killick, 1998, p. 158).

b. The Outcome of Negotiations: Is Fund Lending Influenced by Politics?

Do some member countries manage to ‘cut a better deal’ with the Fund than

others? Is there a systematic political or institutional bias in IMF lending?

The previous section suggested that governments embarking upon negotiations

with the Fund will be looking for financial assistance and may be looking for an

endorsement for economic policy. But what will the Fund be looking for? What

is the Fund’s objective function?

Political economy analysis contributes to understanding these issues. A public

choice approach to the Fund presents it as a largely independent bureaucracy

interested in maximising its own size and power. The implication is that the Fund

will be keen to extend its portfolio of lending, increase its resources and increase

the amount of conditionality that it attaches to its loans. In its extreme form this

approach has the Fund’s staff attempting to maximise their own remuneration

and responsibility.4

Softer versions of the public choice approach reject the self-interest motivation

of Fund staff but still maintain that bureaucratic arrangements within the Fund

affect its lending (Willett, 1999).

Assuming that governments attach utility to IMF loans but disutility to IMF

conditionality, the outcome of negotiations depends on the relative bargaining

strengths of the Fund and the governments with which it is negotiating. A coun-

try desperately in need of foreign exchange but with no alternative source of

supply will be in a weak bargaining position, especially if it is small economic-

ally, strategically insignificant, and lacking allies amongst the Fund’s major

shareholders. Meanwhile, a large and influential country which retains some

access to private capital will be in a stronger bargaining position. Generally

4 A strong advocate of this approach to IMF lending has been Vaubel (1991, 1994 and 1996).



therefore countries which turn to the Fund in the midst of a crisis will be under

greater pressure to concede to the Fund in terms of conditionality.

While the public choice approach suggests that the design of IMF programmes

in such circumstances will reflect the independent preferences of the Fund’s staff

or management for policies of macroeconomic stabilisation and economic liber-

alisation, there is little suggestion of political manipulation. An alternative view

is that the Fund acts as an agent for others. But who are the principals?5

Given the structure of voting within the Fund, industrial countries exert a

dominant influence, with the US holding an effective veto on decisions that require

a super-majority.6 Do industrialised countries use their influence to affect the Fund’s

lending policies both quantitatively in terms of the amount of lending and qualita-

tively in terms of the contents of conditionality? Again while there is an abundance

of anecdotes that this happens, there are only relatively few studies that set out to

examine the extent to which politics exerts a systematic effect on IMF lending.

Unfortunately no completely clear picture emerges. It is, in any case, difficult

to model political influences and to identify variables that capture them. Even

when statistical associations are found, causation may be uncertain. As noted ear-

lier, a relatively low propensity amongst socialist countries to enter into arrange-

ments with the Fund may reflect either the unwillingness of the IMF, under the

influence of its major shareholders, to make such loans, or an unwillingness by

the countries themselves to apply to the Fund.

Early work by Stiles (1991) did find evidence that not all borrowers were

treated equally and that large and important countries received favourable treat-

ment in terms of the design of conditionality. Thacker (1999) finds that ideological

proximity to the US has exerted a positive effect on the probability of receiving

IMF loans and that such political factors enhanced the ability of models to

explain IMF lending. A similar US effect is found by Barro and Lee (2001) who

argue that the effect does not extend to other industrial countries. Although

measured in a different way, the ‘US factor’ is confirmed by Stone (2002) in his

analysis of IMF lending to transition economies during the 1990s. He also finds

that other industrial countries do not exert a similar influence.

In another study examining a larger set of data, the authors discover nuanced

findings, with results varying with the sample (Bird and Rowlands, 2001a). In con-

trast to the above studies, they find little compelling evidence for a US effect but

do find that in the pre-1989 period IMF programmes were associated with tighter

5 Killick was early to use the principal-agent framework for analysing the Fund, although in hiscase he presented the Fund as the principal and the government of the borrowing country as itsagent. He then uses agency problems to explain the poor performance of conditionality. For adetailed analysis see Killick (1998).6 The US alone accounted for 18.25 per cent of total quotas in 1998. Japan and Germany accountedfor 5.7 per cent each, and the UK and France for 5.12 per cent. These five industrial countriestogether therefore accounted for nearly 40 per cent of total quotas.



TABLE 1Estimation Results for Two Models of IMF Lending

Variables Economic Model Supplemented Model

Constant −0.794*** (−5.31) −0.962*** (−2.73)GNP per capita −0.101*** (−2.13) −0.0391 (−0.74)GDP growth −0.00186 (−0.49) −0.00263 (−0.67)Reserves/imports −0.990*** (−4.14) −0.904*** (−3.46)Change in reserves −0.218** (−2.27) −0.264*** (−2.55)Current account/GDP −0.0124* (−1.66) −0.0171** (−2.16)Real exchange rate change 0.77*** (2.58) −0.234*** (2.89)Debt-service ratio 1.41*** (3.72) 1.59*** (3.66)Change in debt-service ratio −0.000295 (−0.80) −0.000288 (−0.72)Debt/GDP −0.257* (−1.83) −0.307** (−1.98)Arrears/debt −0.485 (−0.72) −0.0508 (−0.07)Past reschedulings 0.338*** (4.64) 0.186*** (2.31)Real LIBOR −0.0279 (−1.31) −0.036 (−1.39)Change in real LIBOR 0.0759*** (3.02) 0.0929*** (3.16)US exports – −0.813** (−2.10)French exports (Africa) – −0.0113 (−0.84)Socialist – −0.828** (−1.99)Recent government – −0.392 (−1.34)Civil freedom – 0.0151 (0.378)Change in civil freedom – 0.122** (1.96)Coup frequency – 0.326* (1.73)Past incomplete programmes – 0.0443 (0.76)Imminent quota review – −0.0358 (−0.27)IMF liquidity – −0.229 (−0.49)Gross real GDP – 0.117 (1.03)Imminent rescheduling 2.49*** (3.54) 2.63*** (3.61)Imminent new government – −0.234* (−1.74)Past IMF agreements – 0.0411*** (5.00)

Number of observations 1041 1041Per cent correct predictions 82.22 82.71No. of correct predictions 856 861No. of positive observations 189 189R-squared 0.129 0.185

Notes:The t-statistics appear in parentheses. Coefficient estimates marked *, **, and *** are statistically significant atthe 0.05, 0.025, and 0.01 levels of confidence for a one-tailed test. The dependent variable indicates a signingof an SBA (Stand-by Arrangement), EFF or ESAF (Enhanced Structural Adjustment Facility) arrangement. Fulldetails of the models and the results may be found in Bird and Rowlands (2001a).

Source: Bird and Rowlands (2001a).

restrictions of civil liberties, a correlation that disappears in the post-1989 period

suggesting that the Fund may be paying more attention to good governance as a

pre-condition for the effectiveness of policy, something confirmed by other studies

that point to governance-related components of conditionality (Kapur and Webb,

2000). The findings of Bird and Rowlands (2001a) are summarised in Table 1.



In general, they conclude that while they may be significant in individual

cases, the addition of political and institutional factors adds only marginally to

the overall and systematic explanation of IMF lending, which is still far from

perfect.

Other analyses which adopt an agency framework have, however, suggested

that the principal may not be the Fund’s major shareholders at all but rather

international financiers (Gould, 2000). If the Fund is anxious to encourage pri-

vate capital markets to lend to countries with which it has programmes, it has to

ensure that policies are pursued of which the markets approve. Does the Fund, in

effect, serve the interests of international creditors and if so are these in conflict

with the interests of member countries? There are suggestions of such a trade-off

within the literature (Stiglitz, 2000). During the 1980s the suggestion was made

that the Fund was acting as a ‘debt collector’ for private international banks

rather than as an ‘honest broker’. During the 1990s an influential argument was

that Fund loans were ‘bailing out’ private creditors and that the related moral

hazard encouraged overlending which then increased the probability of crisis.

However, there are variations on the theme of the relationship between the IMF

and private international investors. Bhagwati (1998) suggests that, given similar

educational background and geographical proximity, it is unsurprising that staff

at the IMF, the US Treasury and international investors tend to have a similar

approach to policy design. There is a nexus around the superiority of policies

which combine economic stabilisation and liberalisation. An alternative inter-

pretation sees the Fund as the leader in formulating opinions about which policies

are best. This view gives the Fund an independent and key role, but also implies

a circularity of argument. The Fund advocates policies claiming that they are

needed to restore market confidence. At the same time, the markets’ perception

of appropriate policies is strongly influenced by the design of IMF conditionality

(Rodrik, 1999). If this picture is in any way close to reality, the idea of the Fund

acting purely as an agent for private investors is too simplistic.

It is difficult to reach a judgement between these competing ideas from the

evidence. Certainly there has been an increase in conditionality. It has become

more wide-ranging, moving from traditional stabilisation measures into structural

adjustment and issues of governance. The average number of performance criteria

per programme has increased.7 But this observed trend could be consistent

with both the public choice approach which sees the Fund as an independent

7 Polak (1991) and Killick (1995a) catalogue this increase in conditionality. Kapur and Webb(2000) discuss the more recent move towards governance-related conditionality and provideempirical evidence to support its growth. This raises the question of whether conditionality hasbecome excessive. Certainly Killick is critical of conditionality as a modality for encouragingeconomic reform. Collier has been another influential critic. See, for example, Collier et al. (1997).Kapur and Webb are generally critical of the move towards governance-related conditionalitylargely because it is difficult to define and implement.



bureaucracy exploiting its monopoly power as well as agency interpretations.

Either way, increasing conditionality has an additional political economy dimension.

A number of influential commentators have argued that conditionality has

become excessive in terms of by-passing domestic political processes. Govern-

ments are elected in large part to formulate economic policy. If they then delegate

this responsibility to the IMF, which in turn advocates policies that conflict with

their preferences, where is the democratic legitimacy for these policies? Accord-

ing to this view the Fund undermines domestic political processes. The inequity

in treatment is that, with the support of industrial countries, the Fund requires

developing countries and transition countries to accept a degree of conditionality

that would be deemed unacceptable by the industrial countries themselves if they

were forced to borrow from the Fund (Feldstein, 1998; and Stiglitz, 2000).

Excessive conditionality has a more practical implication. Where countries feel

that they have been coerced into adopting policies which lack domestic author-

isation they are likely to remain uncommitted to them and will seek to abandon

them as soon as the opportunity arises. Bird (2001a) suggests that there may be a

‘conditionality Laffer curve’. As the number of conditions increases so the com-

mitment to the programme, or simply the ability to deliver on all conditions

diminishes, with the result that programmes become more likely to be perceived

as failing.8 What factors influence the effectiveness of IMF programmes?

c. The Effectiveness of IMF Programmes and the Political Economy of

Implementation

For IMF programmes to be effective they need to be not only well-designed

but also implemented. To what extent does the IMF, via its conditionality, actually

influence economic policy in the countries that borrow from it, or is this deter-

mined by other factors? Killick (1998) concludes that, based on a

multitude of differing considerations and a mass of evidence, the overall message which emergesis simple, domestic political calculations dominate decisions about economic policy changesand donor agencies (including the IMF) are relatively powerless in the face of this (pp. 151–52).

Many other studies arrive at similar conclusions. Thus Nelson (1990) argues that

‘broadly, external agencies were less important than domestic political forces in

determining the timing and scope of adjustment decisions’ (p. 330). Haggard and

Kaufman (1992) observe a range of outcomes despite similar international pres-

sure, with the implication that it is differences in the domestic political situation

that dominate. Bates and Krueger (1993) also stress the dominance of domestic

politics in policy reform. Williamson (1994) emphasises political factors such as

8 The IMF (2001a) claims that there is no evidence to support the idea that implementationdeclines alongside the number of conditions. See also Ivanova, Mayer, Mourmouras and Anayiatos(2001).



the coherence of the government’s economic team, the solidity of the govern-

ment’s political base, the quality of the leadership and the comprehensiveness

of the programme in explaining the introduction of policy reform. It is easy to see

why the Fund has attributed the failure of programmes to a lack of political will

on behalf of governments to see them through.

But this is the beginning of the story and not the end of it. If we are to

understand why some programmes are implemented whilst others are not, we

need to understand better the political economy of policy reform. A useful start-

ing place is a simple cost-benefit framework (Bird, 1998a). When governments

sign programmes they see the benefits in terms of possible additional capital

inflows and the chance of improved macroeconomic performance as outweighing

the costs of conditionality. As the programme progresses, however, they may

reassess their opinion. The benefits may fail to materialise or the costs in terms

of the political repercussions of the programme may turn out to be greater than

expected.9 When, at the margin, the costs are perceived to exceed the benefits

the programme will be allowed to lapse. Ironically it may also lapse if the

benefits, in terms of an enhanced inflow of capital from other sources or eco-

nomic improvement, make the country less reliant on the IMF for financial

support. The balance of payments need that justified the initial referral to the

Fund may disappear or balance of payments correction may become a less press-

ing priority for the government.

Apart from the loss of sovereignty noted earlier, the costs of IMF programmes

may be felt in terms of reduced domestic absorption, with a potential decline in

consumption, private sector investment and governmental expenditure, frictional

costs, as resources are reallocated in response to changed relative prices, and dis-

tributional effects, as some sectors of society lose and others gain. The conventional

wisdom is that IMF programmes will tend to have a negative effect on income

equality. Cuts in government expenditure in the form of welfare programmes,

9 Empirical evidence is useful in this context. There is a large literature which attempts to assessthe macroeconomic effects of IMF programmes. This is open to different interpretations. But,broadly speaking, while programmes may have a modest beneficial effect on the balance of pay-ments there is little evidence of a significant beneficial effect on inflation or economic growth.Indeed there is some evidence of a negative effect on the latter in the short and long run (Conway,1994; Killick, 1995a; Przeworski and Vreeland, 2000; and Bird, 2001b). Similarly there is littleempirical evidence to suggest that there is a significant catalytic effect on other capital flows (Birdand Rowlands, 2002). In part this may help to explain why there is a tendency for countries not tocomply with conditionality and allow it to lapse. Yet, on the other hand, claims that IMF involve-ment creates severe domestic political instability have themselves found little empirical support.From a large sample, and attempting to control for the economic crises that may have led to theFund becoming involved, Siddell (1988) concludes that IMF programmes have not significantlyincreased political instability or even episodes of collective protest. A similar conclusion is reachedby Moore and Scarritt (1990) in a study of Sub-Saharan Africa. More subtle questions about thepolitical ramifications of IMF programmes in terms of social cohesion remain to be answered (seeBird and Mosley, 2002).



education and health, as well as reduced subsidies combined with the inflationary

effects of devaluation against which poorer sectors of society, particularly the

urban poor, may find it more difficult to defend themselves, may mean that IMF

programmes adversely affect poverty. This may weaken social cohesion and

create political problems for the government.

Up until now there are relatively few studies which examine the effects of

economic adjustment on poverty and income distribution, and even fewer that

specifically examine the effects of IMF programmes on these issues.10 The con-

nections are complex and it is perhaps unsurprising that no straightforward answer

emerges. It is not just a matter of assessing the effects of IMF programmes on

income distribution and poverty but also the extent to which these effects, if they

are forthcoming, are politically important and induce governments to try and offset

them. In a recent study Garuda (2000) concludes that there is evidence of a

significant deterioration in income distribution and the incomes of the poor in Fund programmecountries relative to their non-programme counterparts when pre-programme external imbalanceis severe. In cases where prior external imbalance is not great, countries participating in Fundprogrammes actually show relative improvements in distributional indicators.

Vreeland (2000) presents additional evidence that the labour share may be ad-

versely affected by IMF programmes.

A broader but no less complex issue of political economy relates to ‘owner-

ship’.11 The hypothesis is that programmes will be more successful if they are

domestically owned as opposed to being imposed from abroad. But what deter-

mines ownership? It is difficult to move forward from the intuitive appeal of the

idea to more precise and meaningful measurement. Having said this, while the

design of a programme draws heavily on economics, the ownership of it depends

heavily on politics,12 and the politics of policy implementation in turn depends on

the distribution of the costs and benefits of reform and the political power of

those advantaged and disadvantaged.

Following any policy change there are likely to be gainers and losers. Motiv-

ated from self-interest it may be assumed that gainers will support reform and

losers will oppose it. There will be a conflict of interest within the country

adopting the policy reform. The question is whether the losers have the power to

block reform. Are they ‘veto players’? In implementing policy, governments will

be constrained by such veto players. In order to be politically feasible, policy

reform will have to win the support of the interest groups with veto powers.

10 For a general review of the effects of structural adjustment on poverty, see Killick (1995b).Different adjustment policies are likely to have different political consequences (Morrisson, 1996).For an early study of the income distributive effects of IMF programmes see Pastor (1987).11 Killick (1998) provides a comprehensive discussion of the issues involved and the evidencesupporting the significance of ownership in explaining the success or failure of policy reform.12 It may also depend on the way in which advice is given and the psychology of advising. SeeBird (1996a) for a brief discussion.



Upon what will this depend? As a minimum it may superficially appear that they

need to be compensated for the losses they incur. However, the status quo may

not be sustainable, and against this background interest groups may attempt to

influence policy in a way that minimises their losses.13 Because of veto players,

even a programme of reform that ex post would yield net gains may be rejected

if, ex ante, powerful interest groups believe that they will lose.

The idea that political economy variables may significantly influence the out-

come of IMF programmes has been more formally tested recently by Ivanova,

Mayer, Mourmouras and Anayiotos (2001). This research offers advances across

a number of fronts. First, they construct various indicators of policy implementa-

tion within the context of IMF programmes. Second, they build a series of eco-

nometric models which they use to empirically test the relationship between

implementation and initial conditions, political economy influences, and Fund

effort and conditionality over the period 1992–98. They summarise their findings

by claiming that:

the prospects of Fund-supported reform programmes depend primarily on domestic politicaleconomy conditions. Ethnic and linguistic divisions, strong special interests, and lack of politicalcohesion contribute to programme failures. Fund effort or the structure of conditionality do notmaterially influence programme prospects.

In some key respects, notably in identifying the importance of domestic

political economy variables, they present their results as reinforcing those of

Dollar and Svensson (2000) relating to the World Bank. However, unlike Dollar

and Svensson, they include an indicator designed to capture the power of vested

interest groups in member countries and find that this exerts a significant effect

on implementation.

Part of the richness of the research by Ivanova et al. (2001) lies in the wide

variety of empirical evidence that they present. However, Table 2 is illustrative

of their findings. Although the results reported in this table do not allow for the

endogeneity of Fund variables including Fund effort and the impact of con-

ditionality, subsequent tests that they undertake and report in their paper using

instrumental variables suggest that this does not undermine the legitimacy of the

results presented here. Table 2 reveals the results of a range of random effects

estimations. Programme success is based on a combination of three measures of

implementation. Columns 1–4 report various tests on potential explanations of

success or failure. Column 1 focuses on the variables used by Dollar and Svensson

(2000), but unlike them reveals insignificant results. Column 2 moves on to

13 It is in this way that Drazen (2001) attempts to resolve what he presents as an otherwisefundamental inconsistency between ownership and conditionality in the context of IMF programmes.Conditionality may be used to help protect the interests of veto players and IMF lending may beused to provide the finance in order to do this, or it may be used to limit the government’sperceived ability to negotiate with special interests. This may be needed in order to bring vetoplayers on side and ensure that they do not block reform.



TA

BL

E 2

The

Imple

men

tati

on o

f IM

F P

rog

ram

mes

: R

esult

s of

Ran

dom

Eff

ects

Model

: L

inea

r in

Pro

bab

ilit

y a

nd T

obit

Reg

ress

ions*

Reg

ress

ion N

um

ber

(1)

(2)

(3)

(4)

Dep

enden

t V

aria

ble

:L

inea

r in

Tobit

Lin

ear

inT

obit

Lin

ear

inT

obit

Lin

ear

inT

obit

Pro

gra

mm

e S

ucc

ess

Pro

bab

ilit

yP

robab

ilit

yP

robab

ilit

yP

robab

ilit

yN

um

ber

of

Obse

rvat

ions

208

208

145

145

154

154

147

147

D&

S v

aria

ble

sE

thnic

Fra

ctio

nal

isat

ion

0.6

81.4

61.7

52.8

81.8

43.2

92.0

43.6

4

(1.2

4)

(1.4

3)

(3.1

1)

(3.0

5)

(3.8

3)

(3.7

5)

(3.0

61

)(3

.66

)E

thnic

Fra

ctio

nal

isat

ion

−0.0

1−0

.02

−−−− −0.0

2−−−− −0

.03

−−−− −0.0

2−−−− −0

.03

−−−− −0.0

2−−−− −0

.04

(sq

uar

ed)

−(1

.20

)−(

1.5

3)

−(2

.56

)−(

2.7

3)

−(3

.45

)−(

3.5

3)

−(3

.44

)−(

3.4

7)

Poli

tica

l In

stab

ilit

y1

−0.8

8−2

.31

−1.9

2−−−− −6

.29

−−−− −2.8

2−−−− −6

.10

−−−− −3.1

7−−−− −5

.76

−(0

.86

)−(

1.2

1)

−(0

.90

)−(

1.6

9)

−(1

.88

)−(

2.2

3)

−(1

.99

)−(

2.0

7)

Exec

uti

ve

Index

of

5.6

85.8

03.4

611.0

87.0

812

.21

7.7

413.8

1E

lect

ora

l C

om

pet

itiv

enes

s2(0

.69

)(0

.38

)(0

.35

)(0

.67

)(0

.87

)(0

.86

)(0

.92

)(0

.97

)T

ime

in P

ow

er0.7

72.9

01.1

03.7

40.7

92.9

91.4

33.6

0(0

.66

)(1

.34

)(0

.61

)(1

.25

)(0

.53

)(1

.12

)(0

.88

)(1

.27

)T

ime

in P

ow

er (

squar

ed)

−0.0

1−0

.07

−0.0

6−−−− −0

.17

−0.0

6−−−− −0

.16

−0.0

7−−−− −0

.16

−(0

.41

)−(

1.2

2)

−(1

.05

)−(

1.8

0)

−(1

.18

)−(

1.7

7)

−(1

.36

)−(

1.6

9)

Oth

er P

oli

tica

l E

conom

yS

tren

gth

of

Spec

ial

Inte

rest

s3−−−− −3

0.1

9−−−− −6

6.6

8−−−− −3

2.5

1−−−− −6

0.8

1−−−− −3

8.8

6−−−− −7

4.4

8

−(1

.93

)−(

2.4

2)

−(2

.90

)−(

2.9

7)

−(2

.93

)−(

3.1

4)

Index

of

Poli

tica

l C

ohes

ion

413.0

026.7

214.8

127.9

014.4

825.3

4

(2.6

0)

(3.0

9)

(3.8

1)

(3.9

4)

(3.1

8)

(3.1

9)

Qual

ity o

f B

ure

aucr

acy

514.2

437.5

815.6

632.8

019.1

636.0

4

Inte

ract

ed w

ith C

han

ge

(1.3

5)

(2.0

1)

(1.8

9)

(2.1

4)

(2.2

5)

(2.3

9)

in C

hie

f E

xec

uti

ve

Cen

tral

Gover

nm

ent

Bal

ance

0.5

20.2

3(i

n p

er c

ent

of

GD

P)

(0.4

0)

(0.1

1)

Lev

el o

f R

eser

ves

(0.0

6)

(0.0

5)

0.0

4−0

.23

Infl

atio

n(0

.21)

−(0

.73

)C

urr

ent

Acc

ount

Bal

ance

−87

−11

0(i

n p

er c

ent

of

GD

P)

−(1

.19

)−(

0.8

9)

GD

P p

er c

apit

a (l

og)

4.6

72.2

2(0

.72

)(0

.20

)D

ebt

to t

he

Fund

−3.9

01

4.4

0(p

er c

ent

of

Fund Q

uota

)−(

0.2

7)

(0.5

5)



TA

BL

E 2

Conti

nued

Reg

ress

ion

Num

ber

(1)

(2)

(3)

(4)

Ext

ernal

Condit

ions

Ter

ms

of

Tra

de

Shock

−0.0

1−0

.01

−(1

.26

)−(

0.4

7)

Vari

able

s under

the

Fund

4.8

313.3

8F

und E

ffo

rt6 (

log)

(0.9

0)

(1.4

6)

Num

ber

of

Condit

ions

per

−0.1

2−0

.25

Pro

gra

mm

e Y

ear

−(0

.69

)−(

0.8

6)

Shar

e of

Quan

tita

tive

PC

s−0

.28

−0.6

5W

aived

(p

er c

ent)

−(1

.09

)−(

1.4

4)

Shar

e of

Str

uct

ura

l C

ondit

ions

0.2

00.2

9(p

er c

ent)

(1.2

4)

(1.0

1)

Loan

Siz

e as

per

cen

t of

0.6

3−0

.28

Quota

(lo

g)

(0.1

1)

−(0

.03

)W

ald C

hi2

sta

tist

ics

4.3

37.3

139.4

142.4

744.4

143.6

547.6

545.4

2p-v

alue

0.6

30.2

90.0

00.0

00.0

00

.00

0.0

00.0

0

No

tes:

Bold

figure

s in

dic

ate

signifi

cance

at

the

5 p

er c

ent

level

.* T

his

model

was

est

imat

ed o

n a

poole

d s

ample

of

thre

e im

ple

men

tati

on m

easu

res

as l

eft-

han

d v

aria

ble

s, i

gnori

ng t

he

endogen

eity

of

var

iab

les

un

der

th

e F

un

d’s

co

ntr

ol.

The

mea

sure

s of

pro

gra

mm

e su

cces

s use

d a

re:

(1)

a bin

ary v

aria

ble

indic

atin

g n

o i

rrev

ersi

ble

pro

gra

mm

e in

terr

upti

on;

(2)

the

shar

e of

funds

com

mit

ted b

y t

he

Fund

under

an a

rran

gem

ent

dis

burs

ed (

we

excl

uded

the

mea

sure

of

com

mit

ted f

unds

dis

burs

ed f

or

arra

ngem

ents

pre

cauti

onar

y o

n a

ppro

val

; ca

nce

lled

pro

gra

mm

es t

hat

did

not

hav

e ir

rever

sible

inte

rrupti

on a

nd a

rran

gem

ents

that

turn

ed p

reca

uti

onar

y w

ere

trea

ted a

s fu

lly d

isburs

ed (

100 p

er c

ent)

); a

nd (

3)

the

aver

age

shar

e of

condit

ions

imple

men

ted.

Reg

ress

ion a

lso i

ncl

uded

const

ant

term

, w

hic

h i

s om

itte

d i

n t

he

table

.1 T

his

index

is

com

pute

d b

ased

on t

he

index

of

inte

rnal

confl

ict

pro

vid

ed b

y t

he

ICR

G o

n a

sca

le f

rom

0 t

o 1

2.

Hig

her

val

ues

of

the

index

corr

espond t

o m

ore

inte

r-nal

poli

tica

l in

stab

ilit

y.

We

repla

ced t

he

val

ue

of

this

var

iable

by i

ts m

axim

um

sco

re (

12)

if t

her

e w

as a

chan

ge

in c

hie

f ex

ecuti

ve

in t

he

cours

e of

Fund p

rogra

mm

e.2 D

um

my v

aria

ble

whic

h e

qual

s 1 i

f th

e ex

ecuti

ve

index

of

elec

tora

l co

mpet

itiv

enes

s is

equal

to 7

and z

ero o

ther

wis

e. T

he

exec

uti

ve

index

of

elec

tora

l co

mpet

itiv

enes

sis

fro

m t

he

Dat

abas

e of

Poli

tica

l In

stit

uti

ons

at t

he

Worl

d B

ank.

It r

anges

fro

m 1

to 7

, w

ith h

igher

val

ues

corr

espondin

g t

o m

ore

com

pet

itiv

e el

ecti

ons.

3 C

om

pute

d a

s a

max

imum

shar

e of

seat

s in

the

par

liam

ent

hel

d b

y p

arti

es r

epre

senti

ng s

pec

ial

inte

rest

s (P

oli

tica

l In

stit

uti

ons

Dat

abas

e, W

orl

d B

ank).

Four

spec

ial

inte

rest

gro

ups

are

iden

tifi

ed:

reli

gio

us,

nat

ional

isti

c, r

egio

nal

and r

ura

l.4 T

he

index

of

poli

tica

l co

hes

ion i

s defi

ned

as

foll

ow

s: i

n p

resi

den

tial

syst

ems

a hig

h d

egre

e of

poli

tica

l co

hes

ion i

s sa

id t

o e

xis

t if

the

sam

e par

ty i

s in

contr

ol

of

the

exec

uti

ve

and l

egis

latu

re;

in p

arli

amen

tary

syst

ems

a hig

h d

egre

e of

poli

tica

l co

hes

ion m

eans

a one-

par

ty m

ajori

ty g

over

nm

ent.

See

the

Annex

in t

he

ori

gin

al s

ourc

e fo

ra

more

det

aile

ddefi

nit

ion.

5 B

ure

aucr

acy q

ual

ity (

ICR

G)

mea

sure

s th

e qual

ity o

f a

countr

y’s

bure

aucr

acy o

n a

4-p

oin

t sc

ale.

See

the

Annex

for

a m

ore

det

aile

d d

efinit

ion.

We

inte

ract

ed t

his

var

iable

wit

h t

he

dum

my i

ndic

atin

g t

hat

ther

e w

as a

chan

ge

in c

hie

f ex

ecuti

ve

(Poli

tica

l In

stit

uti

ons

Dat

abas

e an

d C

IA W

orl

d F

act

Book f

or

most

rec

ent

yea

rs).

6 F

und e

ffort

is

esti

mat

ed d

oll

ar c

ost

of

Fund p

rogra

mm

es c

om

pute

r bas

ed o

n B

RS

dat

a on h

ours

spen

t by t

he

staf

f on p

rogra

mm

e im

ple

men

tati

on (

it i

ncl

udes

both

pre

par

atio

n a

nd s

uper

vis

ion o

f th

e pro

gra

mm

e) a

nd e

stim

ated

aver

age

sala

ries

of

the

staf

f by g

rade.

We

also

mad

e use

of

the

doll

ar c

ost

s of

resi

den

t re

pre

senta

tives

pro

vid

ed b

y O

PM

.

Sourc

e: I

van

ova,

May

er,

Mourm

oura

s an

d A

nay

ioti

s (2

001).



examine the significance of vested interest groups. In the Tobit model not only do

these appear as significant but, with their addition, the coefficients on ethnic

fractionalisation become significant. Column 3 excludes initial conditions which

were found to be insignificant in the earlier estimations and column 4 includes a

set of variables which are under the Fund’s control, ignoring their endogeneity.

These variables are found to be insignificant. In broad terms it appears that the

prospects for IMF programmes depend on a number of domestic political economy

indicators, including the strength of special interests, as the theory relating to the

key role of veto players would suggest.

Further evidence suggesting that political economy variables are significant in

determining the implementation of IMF programmes is provided by Thomas

(2002). This study confirms the importance of political stability and a good

bureaucracy in encouraging implementation. However, in contrast to Dollar and

Svensson (2000) who found that implementation improves with democratically

elected governments and Ivanova et al. (2001), who found no significant connec-

tion, Thomas finds that autocratic regimes have a better record of implementa-

tion. This reveals that while research is discovering areas of consensus there

remain areas of disagreement about exactly how political economy variables

exert their impact.

In a recent study (IMF, 2001b), the IMF reviews a number of cases where

powerful interest groups, and the opposition of vulnerable groups who expected

to be adversely affected, impaired the implementation of economic reform. In

Zimbabwe progress with reform in the early 1990s was halted as internal opposi-

tion became stronger. In the Kyrgyz Republic the government encountered

repeated problems in gaining the political support necessary to push through

reforms. The 1993 IMF programme was opposed by members of parliament who

had been appointed prior to the break up of the Soviet Union comprising in large

measure managers of state enterprises and local officials. Meanwhile another

example could be Brazil at the end of the 1990s when economic stabilisation and

reform was impeded by the difficulties encountered in reducing the fiscal deficit,

as a result of parliamentary opposition and regional interests. In contrast, Morocco,

Uganda and Bulgaria may be used as examples where special interests were

overcome and a sufficiently broad political consensus was formed in favour

of reform.

Perhaps the most fully researched case studies along these lines cover Russia

and other countries formerly belonging to the Soviet Union (CIS countries). Here

pro-reform ministers were often pitted against those members of the nomenklatura

who were anxious to defend the rents that they had previously received under the

old centrally planned systems (Aslund, 1999; Hellman and Kaufman, 2001; and

Stone, 2002).

Other case study evidence may be gleaned from amongst countries that have

made a prolonged use of Fund resources over the years. Pakistan had arrangements



with the IMF in both 1994 and 1997. These envisaged far-reaching structural

reforms especially in the fiscal area. Focusing on the 1994 arrangement, it is

noteworthy that the Fund compromised on its initial fiscal targets, but in spite of

this the politically powerful position of the military in Pakistan, particularly at a

time of increasing tensions with India, made it difficult for the government to

reduce government expenditure. While there appeared to be reasonable consen-

sus amongst the political parties that were competing for power at the time about

the need for economic reform, political instability almost certainly contributed to

the problems encountered in implementing the programmes.

Experience in the Philippines during the 1990s provides further evidence of

the importance of political economy factors in affecting the implementation of

IMF programmes. For much of the 1990s, and under strong presidential leader-

ship, substantial progress was made in achieving macroeconomic stability and

structural reform. These reforms were supported by arrangements with the Fund.

However, in the aftermath of the East Asian crisis and with a new government in

power, progress faltered. With less strong presidential leadership, elements of

economic reform stalled in Congress as traditional political forces sought to

reassert their influence and protect sectoral and vested interests. For example, tax

reform was moderated and delayed and reform of the electric power sector also

slowed down. Internally the Fund itself attributed many of the weaknesses exhib-

ited by the Philippines to the disproportionate power of a small elite that were

motivated to retain the rents they enjoyed and by the lack of cohesion that

sometimes existed between the executive and legislative branches of government.

But what happens if programmes break down?

d. Completion and Repeat Use

What are the consequences of non-completion? To some extent the answer to

this question will also have a bearing on the implementation of conditionality

since it will influence the set of incentives that countries encounter. Certainly the

evidence presented in Table 3 reveals a relatively poor record of completion.14

To what extent are countries penalised for failing to complete a programme? Do

they find it harder to negotiate with another one? Will the Fund be less willing to

provide further financial support or will the degree of conditionality be increased

by perhaps switching towards more ex ante conditionality in the form of prior

actions?

These issues of ‘crime and punishment’ have been examined by political

scientists, as have the effects of the likelihood of penalty on the IMF’s credibility

14 There are various ways in which the degree of implementation of conditionality may be meas-ured. These are discussed at length by Ivanova et al. (2001) who find that the measures (includingnon-completion) are correlated.



TABLE 3Fraction of IMF Loan Actually Disbursed Under Each Arrangement, Distribution by Quartiles

(x-fraction of total IMF loan disbursed under each arrangement)1

x0.25 0.25 = 0.25 = x0.75 0.75 = Fully Number ofx0.50 (In Per cent) x1.0 Disbursed Arrangements

(x = 1.0)

All arrangements2

1973–77 36.5 7.1 5.9 5.9 44.7 851978–82 19.4 16.1 10.5 12.9 41.1 1241986–87 12.9 15.8 19.4 7.9 43.9 1391988–92 17.5 15.1 20.6 14.3 32.5 1261993–973 27.0 19.1 26.2 11.3 16.3 141Full period (1973– 21.6 15.3 17.6 10.7 34.8 61597)3 of which:Stand-by3 23.1 13.4 15.0 9.5 39.0 441EFF3 33.3 22.2 19.0 15.9 9.5 63SAF/ESAF3 9.0 18.9 27.0 12.6 32.4 111

Notes:1 Calculated as the ratio of the total purchases made to the full amount of IMF resources committed under eacharrangement.2 Includes stand-by arrangements, EFF arrangements, and arrangements under the SAF and ESAF. ExcludesSTF arrangements, and drawings under the first credit tranche and the CCFF.3 The distribution of the ratio x for the 1993–97 period is biased (downward) by the inclusion of arrangementswith expiration date posterior to 1997. This bias is also present in the distributions reported for the full period.

Source: Mussa and Savastano (1999).

(Bird, 2002a). Edwards (1999) argues that the Fund does sanction miscreants

but is more likely to do this in terms of suspending contemporary programmes

than in terms of excluding them from future programmes. In terms of cross-

country differences Edwards further suggests that the Fund is reasonably neutral

in punishing countries, focusing on whether governments adopt policies of mon-

etary restraint rather than allowing itself to be strongly affected by political

factors such as borrower influence. Stone (2002) reaches rather different conclu-

sions based on his study of transition economies. From amongst his case studies

he argues that influential countries such as Russia will be confident that support

from the Fund will not be withdrawn for long, since there will be pressure from

the US to make loans. Threats from the Fund therefore lack credibility, and such

countries are more likely to exhibit non-compliance. While this may be followed

by programme suspension, the suspension will not last long. Less influential

countries, for example Bulgaria amongst Stone’s case studies, anticipate a larger

penalty for non-compliance and therefore exhibit a superior record of implementa-

tion. Thus Bulgaria’s record of implementation may reflect a combination of

positive domestic political economy variables reported in the previous section

alongside the expectation of a significant penalty for non-compliance, where this

depends largely on external political economy variables.



3. CONCLUDING REMARKS

A recent trend in the literature dealing with the IMF has been to begin to

include a political economy dimension. Political economy variables seem likely

to affect many aspects of the Fund’s operations as well as its governance; the

increasing attention that is being paid to the political economy of the Fund seems

entirely appropriate. Indeed, ignoring this dimension will result in unbalanced

and potentially unhelpful analysis. Moreover, the attempt directly and formally

to include a political economy dimension represents an advance on earlier pro-

clivities to incorporate political variables simply as a residual.

The main purpose of this paper has been to provide a synthesis of some

political economy aspects of the IMF. To do this we have adopted the conceptual

framework of the life cycle of an IMF programme and have examined how

political economy variables will influence various stages of this life cycle; the

original decision to turn to the Fund for assistance, the negotiation of a pro-

gramme, and the ensuing pattern of IMF lending, the implementation of the

programme, the extent to which it is completed and what happens if it is un-

completed. Not only do we draw out the relevant political economy aspects of

each stage but we also use available empirical evidence to inform our analysis of

the issues to gain some idea of their empirical importance.

The findings reported here are not solely of academic interest; they also have

important policy implications. In attempting to improve their effectiveness, it is

important to understand why IMF programmes may fail. Wrong diagnosis is

likely to lead to wrong treatment. One suggestion in the literature has been that

the Fund should switch away from ex post and towards ex ante conditionality.

Indeed, in line with this, the Fund has tended to increase the emphasis on ‘prior

actions’ in the case of replacement programmes. However, the analysis in this

paper suggests that such a switch may be relatively unsuccessful in improving the

effectiveness of programmes – something that is confirmed by direct evidence on

the issue (Thomas, 2002). Instead, a political economy approach suggests that the

Fund needs to better understand the political economy variables that empirical

evidence shows to exert a significant influence over outcomes. The Fund could

then use this understanding either to try and help make these influences positive

by, in essence, attempting to strengthen ownership, or it could be more selective

in its allocation of assistance; limiting its support to countries where political

economy variables are consistent with a high probability of a positive outcome.

By improving the track record of its programmes the Fund could also raise its

credibility and enhance the signalling and catalytic effects of conditionality. Simi-

larly, by being stricter on the negotiation of replacement programmes, the Fund

could create stronger incentives for countries to comply with conditionality and

could ameliorate the tendency for some countries to use Fund resources over

a prolonged period of time with little improvement in underlying economic



performance. The challenge is to move forward from recognising that political

economy variables are important towards a better understanding of precisely

what the political economy variables are, and the modalities through which they

exert their influence; a process which is frequently constrained by the availability

of data. This represents a research agenda for the next few years (see Bird,

2002b, for some preliminary ideas).

Assuming that political economy analysis of the IMF enables reform measures

to be identified that could improve its effectiveness, how likely is it that they will

be adopted? How susceptible to reform is the IMF? Reform is more likely when

the status quo becomes widely regarded as unsatisfactory and when there is

reasonable consensus about the direction that reform should take (Bird, 1996b).

However, unsatisfactory performance may take the form of a crisis, and in these

circumstances reform is more likely to be of a knee-jerk and partial type. The

Fund has usually responded to suggestions that it is deficient in some way by

adding new lending windows. Fundamental reform is unlikely in conditions of

crisis. But neither is it likely when there is no crisis since in these circumstances

the status quo is likely to be deemed satisfactory. Incremental and marginal

reform is therefore more likely than fundamental reform.15

Thus it is that the Mexican and East Asian financial crises initially led to

claims that a new international financial architecture was needed, particularly at a

time when industrial countries believed that they could be affected by contagion.

The Fund was presented as having a potentially larger role to play in predicting

financial crises, helping to avoid them and managing them should they occur.

However, with no further incidence of global financial instability, much of the

urgency seems to have gone out of the architecture debate (Bird, 2001c).

Apart from those relating to conditionality, proposals have also been made for

making the Fund more accountable and transparent and for reversing ‘mission

creep’. But, if political economy/public choice theories of the Fund are accurate,

the presumption must be that these proposals are likely to be rejected by the

Fund. A similar conclusion may follow within an agency framework if the Fund’s

major shareholders have seen advantage from being able to use the IMF as an

indirect and covert conduit for foreign policy and for pushing policies that they

see as being in their own interests. Developing countries that point to their lack

of influence within the Fund may find it difficult to persuade industrial countries

to dilute their influence.16 While political analysis may therefore help to identify

relevant reform of the Fund, political realities may constrain the likelihood that

this will be pursued.

15 As a case study, Bird (1998b) discusses how it was the combination of economics and politicsthat explains the rise and fall of the Special Drawing Right.16 Helleiner (2000) discusses the politics of influence particularly in the context of developingcountries. Part of his discussion relates to their position within the IMF. Kapur (2000) in the samevolume discusses the process of change within international organisations.



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Political Economy Influences Within the Life-Cycle of IMF Programmes

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