Published online by Cambridge University Press: 05 November 2018
A large literature has established that the International Monetary Fund (IMF) is heavily politicized. We argue that this politicization has important consequences for international reserve accumulation and financial crises. The IMF generates moral hazard asymmetrically, reducing the expected costs of risky lending and policies for states that are politically influential vis-à-vis the institution. Using a panel data set covering 1980 to 2010, we show that proxies for political influence over the IMF are associated with outcomes indicative of moral hazard: lower international reserves and more frequent financial crises. We support our causal claims by applying the synthetic control method to Taiwan, which was expelled from the IMF in 1980. Consistent with our predictions, Taiwan's expulsion led to a sharp increase in precautionary international reserves and exceptionally conservative financial policies.
We thank James Fearon, Judy Goldstein, Dennis Quinn, James Vreeland, participants at workshops at Georgetown University, Stanford University, the International Political Economy Society Annual Meeting, the Political Economy of International Organizations Annual Meeting, and two anonymous reviewers for helpful feedback. We also thank current and former officials of the IMF, Chinese government, Japanese Ministry of Finance, Japanese Ministry of Foreign Affairs, Taiwanese Ministry of the Economy, Taiwanese Ministry of Foreign Affairs, United States Department of State, United States Department of the Treasury, and World Bank who were exceedingly gracious with their time and resources. This research was made possible by the generous support of the Shorenstein Asia Pacific Research Center, Freeman Spogli Institute for International Studies, and Sakurako and William Fisher.