erica r. gould - imf

7/28/2019 Erica R. Gould - IMF

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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 short-

term 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

1United States IFIAC (2000).


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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 conditional 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 lendingwith numerous structural conditions. The IFIAC (or Meltzer Commission), established by the

2 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, concludingthat 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 ofthese 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 policydecisions 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.


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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 particularly 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

5 United States IFIAC (2000).6

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 longer-

term 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-


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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 fundamentalchanges 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 longer-

term development lending for lower-income developing countries.9

Dell (1981), 12; de Vries (1986) ,504. There were two reviews of conditionality around this time, eachof 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 toensuring 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 inthe 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.


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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 acondition 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

11 Kahn (1999), C3. Other US governmental, 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, whichmake up the bulk of its current activities. The IFIAC Commission advocated this unanimously (3 of 59):

New York Times (1999), A38.; JEC (Dec., 1999).


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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 opposition.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 othermultilateral 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 included 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 See Goldstein (1996), Milner (1998?), Richards (1999).13

Przeworski and Vreeland (2000).


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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. Byemploying 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-SupportedPrograms for some graphs from this data set

(http://www.imf.org/external/p/pdr/cond/2001/eng/overview/index.htm).


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In the remainder of this chapter, I discuss three prominent explanations of changes in

Fund activitiestwo external and one internaland 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 The academic literature on the IMF is surprisingly spare.16

Thacker (1999).


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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 powerfulstates, 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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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 short-

term 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 antepowerful state preferences. By contrast, I argue thatpowerful 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.

22Thacker (1999) argues that the US determines IMF lending, granting loans to countries with compatible

policy positions; Sachs (1989); Kapstein (1994), 96.23A 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 Warperiod. 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:

24Finnemore (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 felloutside 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 o rganizations 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 principalswho may have created them, because of power flowing from at least two sources: (1) thelegitimacy of the rational-legal authority they embody, and (2) control over technicalexpertise 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 inbecoming 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 todo 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 relationshipswhich 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 sociological 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 political interests. For instance,

Przeworski and Vreeland have argued that governments enter into Fund conditional loanarrangements to bolster their position against domestic opponents of their preferred policy.

35The

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.

34Kuhn (1996).

35Przeworski and Vreeland (2000), 391.

36Goldstein (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 Fund-

Supported 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 broadvariation 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


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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 counter-

arguments 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, creditorstates 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,

38e.g., Przeworski (1991?).


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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 state-

centric 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 non-

state 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 actorinterests 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

39For 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 andinstitutions in defining state preferences, see Moravcsik (1997).


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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 tofacilitate exchanges involving external financing and economic-policy measures betweencreditor and debtor countries. These exchanges might otherwise be thwarted bynonexcludability problems attaching to bilateral agreements reached without theFund.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 withnegative side-effects that are avoidable.

45

40 Stein (1982).41

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.43Abbott 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.


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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 andeconomic 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


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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 andmaking exchange between private creditors and debtor countries more efficient. Theirs is a

46 von Furstenberg (1987), 122.47

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 policyconfidentiality.49

Lipson (1981), esp. 606-608.50

sic, Lipson (1981), 606.51

Lipson (1981), 61852

Lipson (1986), 240. He writes that Greater public involvement[since the debt crisis] in internationaldebt 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 tomake good on its bargain with debtor countries, that if they adhere to Fund programs they will receive

outside financing


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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 rolebut

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 Cohen (1983), 332. On this point, he also cites Magnifico (1977), Lipson (1979), and Neu (1979).56

Lipson (1986, 232) also makes the second point.


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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,

57There 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.


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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 statecapital rather than at Fund headquarters, which increases the informational asymmetry between

the Executive Board and the Fund staff. As the Funds historian, Keith Horsefield wrote, the

change in location:

led to the staff acquiring a much more intimate knowledge of the problems of eachmember 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 befaced with draft stand-by arrangements and letters of intent that had been prepared by thestaff in consultation only with the member countryor at most with the Executive

Director immediately concernedand which contained conditions drafted by the staffitself.

61

59Pratt and Zeckhauser (1985), 2-3.

60 See also Maltzman (1997), 10-12.61

Horsefield (1969), 470-3.


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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 conditional 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 ofrejection. 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 Horsefield (1969), 470-3.63 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 commitmentstrategies in Downs and Rocke 1990, 184-90; Downs and Rocke 1995, 98-99.64

On two- level games, see Putnam (1988).


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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 compromisesbetween 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 manynew problems for the government in relation to other sectors of the economy since itsunderstanding with these sectors were reached in the light of the over-all policy packagefor 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.

65EBM/68/128 Use of Funds Resources and Stand-By Arrangement 9/6/68, p. 6.

66A 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 couldnot 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-byarrangements 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.


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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.


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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 monitoring 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, supplementary financiers are more effective at influencing

Fund activities because they appeal to the Funds natural incentives: the success of Fundprograms 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

68Interview with author, August, 2000.

69Interview with author, August, 2000.

70Interview 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,


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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 problemswith 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 isoften 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 length 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

76Most studies have not adequately controlled for selection effects.

77

See Einhorn (1979) for an early empirical study of this regarding SAF and ESAF programs. Also seePolak (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 theirinvestments. 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 providedby 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 theabsence of an integral financing package, the Fund could not be confident that the degreeof adjustment negotiated with the country would be sufficient. To this end the Fundsoughtfinancing assurances from other suppliers of financial assistance. In the secondhalf of the 1980s, however, commercial banks began to exploit this approach. No longerafraid of becoming victims of a generalized debt crisis, the banks began to realize thatthey could insist on favorable terms for themselves by blocking a countrys access toFund 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,

80Polak (1991), 15

81 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 insid

erica r. gould - imf

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