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The High Politics of IMF Lending

  • Strom C. Thacker (a1)

Analysts have long suspected that politics affects the lending patterns of the International Monetary Fund (IMF), but none have adequately specified or systematically tested competing explanations. This paper develops a political explanation of IMF lending and tests it statistically on the developing countries between 1985 and 1994. It finds that political realignment toward the United States, the largest power in the IMF, increases a country's probability of receiving an IMF loan. A country's static political alignment position has no significant impact during this period, suggesting that these processes are best modeled dynamically. An analysis of two subsamples rejects the hypothesis that the IMF has become less politicized since the end of the cold war and suggests that the influence of politics has actually increased since 1990. The behavior of multilateral organizations is still driven by the political interests of their more powerful member states.

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1 The literature on the IMF is extensive. For useful surveys, see Bird Graham, “The International Monetary Fund and the Developing Countries: A Review of the Evidence and Policy Options,” International Organization 50, no. 3 (1996); idem, IMF Lending to Developing Countries: Issues and Evidence (London: Routledge, 1995); Edwards Sebastian, “The International Monetary Fund and the Developing Countries: A Critical Evaluation,” NBER Working Paper, no. 2909 (1989); Killick Tony, IMF Programs in Developing Countries: Design and Impact (London: Routledge, 1995); Williamson John, ed., The Lending Practices of the International Monetary Fund (Washington, D.C: Institute for International Economics, 1982); and idem, IMF Conditionality (Washington, D.C: Institute for International Economics, 1983).

2 For effective treatments of these and related issues, see Keohane Robert O., After Hegemony: Cooperation and Discord in the World Political Economy (Princeton: Princeton University Press, 1984); idem, International Institutions and State Power: Essays in International Relations Theory (Boulder, Colo.: Westview, 1989); idem, “Multilateralism: An Agenda for Research,” International Journal 45, no. 1 (1990); Ruggie John Gerard, ed., Multilateralism Matters: The Theory and Praxis of an Institutional Form (New York: Columbia University Press, 1993); Krasner Stephen D., ed., International Regimes (Ithaca, N.Y.: Cornell University Press, 1983); and Oye Kenneth A., ed., Cooperation under Anarchy (Princeton: Princeton University Press, 1986).

International institutions and multilateralism are not necessarily equivalent. The IMF fits Ruggie's definition in Multilateralism Matters of multilateral organization as “defined by such generalized decision-making rules as voting or consensus procedures” (p. 14). On IMF decision-making procedures, see Southard Frank, “The Evolution of the International Monetary Fund,” Princeton Essays in International Finance, no. 135 (1979); and Lister Frederick K., Decision-Making Strategies for International Organizations, vol. 20, World Affairs (Denver, Colo.: Graduate School of International Studies, University of Denver, 1984).

3 Gallarotti Giulio M., “The Limits of International Organization: Systematic Failure in the Management of International Relations,” International Organization 45, no. 2 (1991).

4 Bird (fn. 1,1995), 124.

5 Rowlands Dane, “Political and Economic Determinants of IMF Conditional Credit Arrangements: 1973–1989” (Manuscript, Norman Paterson School of International Affairs, Carleton University, Ottawa, Ont., 1995).

6 Polak Jacques J., “Monetary Analysis of Income Formation and Payments Problems,” IMF Staff Papers, no. 6 (1957), cited in Edwards (fn. 1); and idem, “The Changing Nature of IMF Conditionality,” Princeton Essays in International Finance, no. 184 (1991); and Swedberg Richard, “The Doctrine of Economic Neutrality of the IMF and the World Bank,” Journal of Peace Research 23 no. 4 (1986).

7 Eckaus R. S., “How the IMF Lives with Its Conditionality,” Policy Sciences 19 (October 1986).

8 Southard (fn. 2), 13; Edwards (fn. 1); Finch C. David, “The IMF: The Record and the Prospects,” Princeton Essays in International Finance, no. 175 (1989); and Spraos John, “IMF Conditionality: Ineffectual, Inefficient, Mistargeted,” Princeton Essays in International Finance, no. 166 (1986).

9 Finch (fn. 8), 2.

10 Schoultz Lars, “Politics, Economics, and U.S. Participation in Multilateral Development Banks,” International Organization 36, no. 3 (1982); Cohen Benjamin J., “International Debt and Linkage Strategies: Some Foreign Policy Implications for the United States,” in Kahler Miles, ed., The Politics of International Debt (Ithaca, N.Y.: Cornell University Press, 1986).

11 Smith Fred L., “The Politics of IMF Lending,” Cato Journal 4 (Spring/Summer 1984). The U.S. representative is “ordered by law to clear his or her decisions with the Secretary of the Treasury.” Swedberg (fn. 6), 379.

12 Stiles Kendall W., Negotiating Debt: The IMF Lending Process (Boulder, Colo.: Westview, 1991).

13 IMF Annual Report (Washington, D.C.: IMF, 1995), 216.

14 See Lister (fn. 2).

15 Lichtensztejn Samuel and Baer Mónica, Fondo Monetario Internacionaly Banco Mundial: Estrategiasy Politicas delPoder Financiero (Mexico City: Ediciones de Cultura Popular, 1987), 6061.

16 Miles Kahler notes that the U.S. has in the past refused to support a renewal of the managing director's tenure when his “accomplishments did not meet American expectations.” Kahler , “The United States and the International Monetary Fund,” in Karns Margaret P. and Mingst Karen A., eds., The United States and Multilateral Institutions (Boston: Unwin Hyman, 1990), 94.

17 The origins of this procedure date back to the Fund's early years, when the U.S. executive director went to great lengths to muffle the strong voice of U.S. power, which nevertheless was decisive. See Southard (fn. 2), 5–6,19–20.

18 Eckaus (fn. 7), 237; Stiles (fn. 12), 37.

19 Ruggie (fn. 2), chap. 1; James A. Caporaso and Miles Kahler attribute part of the postwar economic cooperation to this type of “minilateralism.” The creation of the Bretton Woods monetary order through U.S. and British coordination and the subsequent adjustments made by the G-7 after its breakdown (for example, the Plaza and Louvre accords) can be profitably understood in these terms. Caporaso, “International Relations Theory and Multilateralism: The Search for Foundations,” and Kahler, “Multilateralism with Small and Large Numbers,” in Ruggie (fn. 2).

20 Payer Cheryl, The Debt Trap: The International Monetary Fund and the Third World (New York: Monthly Review Press, 1974); and Swedberg (fn. 6).

21 Kahler (fn. 16), 110.

22 Ibid.

23 Killick (fn. 1), 118–19.

24 Stiles (fn. 12), 196–97.

25 Conway Patrick, “IMF Lending Programs: Participation and Impact,” Journal ofDevelopment Economics 45, no. 2 (1994).

26 He finds statistically significant positive results for prior participation and the percentage of available funds drawn down. A series of dummy variables for each year had generally significant results.

27 Lindert Peter H., “Response to Debt Crisis: What Is Different about the 1980s?” in Eichengreen Barry J. and Lindert , eds., The International Debt Crisis in Historical Perspective (Cambridge: MIT Press, 1989).

28 Bird (fn. 1,1995).

29 This result supports the catalytic impact of IMF lending as providing a “seal of approval” that encourages private banks to resume lending to a country that has negotiated an agreement with the Fund. Bird (fn. 1,1995), 122. A negative result would suggest a substitution effect between IMF and private lending.

30 Spraos (fn. 8); and Finch (fn. 8).

31 Bird (fn. 1, 1995), 109.

32 Ibid., 23.

33 See Amuzegar Jahangir, “The IMF under Fire,” Foreign Policy 64 (Fall 1986).

34 See Bello Walden and Kinley David, “The IMF: An Analysis of the International Monetary Fund's Role in the Third World Debt Crisis, Its Relation to Big Banks, and the Forces Influencing Its Decisions,” Multinational Monitor 4 (1983).

35 Lindert (fn. 27), 245.

36 Killick (fn. 1).

37 Lindert (fn. 27), 243; Bird (fn. 1, 1995), 112.

38 Barry Eichengreen has questioned the impact of the “default penalty” on future credit access. Eichengreen , “The U.S. Capital Market and Foreign Lending, 1920–1955,” in Sachs Jeffrey D., ed., Developing Country Debt and the World Economy (Chicago: University of Chicago Press, 1989), 247. Cf. Eaton Jonathan and Gersovitz Mark, “Debt with Potential Repudiation: Theoretical and Empirical Analysis,” Review of Economic Studies 48 (April 1981).

39 See Brett E. A., “The World's View of the IMF,” in Bureau Latin America, ed., The Poverty Brokers: The IMF and Latin America (London: Latin America Bureau, 1983); Pastor Manuel, “The Effects of IMF Programs in the Third World: Debate and Evidence from Latin America,” World Development 15 (Fall 1987); and Swedberg (fn. 6).

40 The net effect of DFI exposure may depend on the sectoral location of the investment. If it serves primarily the domestic market, a negative result might be expected. If it serves mostly export markets, a positive result would be more likely. The impact of export exposure may depend on whether the product exported is a final consumption good (negative) or an input into the export sector (positive).

41 Bello and Kinley (fn. 34), 14.

42 Awanohara Susumu, “Fiscal Interdiction: U.S., Japan Block IMF Effort to Support Vietnam,” Far Eastern Economic Review, September 28, 1989.

43 Amuzegar (fn. 33); Assetto Valerie J., The Soviet Bloc in the IMF and the IBRD (Boulder, Colo.: Westview, 1988).

44 Ibid., SO.

45 Horowitz Irving Louis, “The ‘Rashomon Effect’: Ideological Proclivities and Political Dilemmas of the IMF,” in Myers Robert J., ed., The Political Morality of the International Monetary Fund (New Brunswick, N.J.: Transaction Books, 1987), 96.

46 Assetto (fn. 43), 184.

47 Frey Bruno S., International Political Economics (London: Basil Blackwell, 1984), chap. 5; Hirschman Albert O., “The Stability of Neutralism: A Geometrical Note,” American Economic Review 54 (March 1964).

48 Timothy J. McKeown, “Resolving the ‘Conditionality Paradox’ in U.S. Bilateral Foreign Aid” (Manuscript, University of North Carolina, Chapel Hill, n.d.).

49 Bird (fn. 1,1995), 149–50.

50 Regressions were run on the amount of the loan divided by GNP, and the general results were similar to those reported here, particularly for the political variables.

51 This figure represents all of the developing countries, as defined by the IMF, for which data were available. See IMF, AnnualReport (Washington, D.C.: IMF, 1986), 162. Data for the indicator of political alignment used here are not available before 1983. For some countries, data are available only for certain years. See Appendix B for a list of countries used in the data analysis.

52 See Aldrich John H. and Nelson Forrest D., Linear Probability, Logit, andProbit Models (Beverly Hills, Calif: Sage, 1984).

53 Two other IMF lending programs, the Structural Adjustment Facility (SAF) and the Enhanced Structural Adjustment Facility (ESAF), are not included in this analysis for a number of reasons. First, only low-income developing countries qualify for SAF and ESAF loans. A large number of countries in the sample would therefore not qualify for these programs, while all are eligible for SBA and EFF packages. Second, the SAF and ESAF are structural adjustment rather than economic stabilization programs. To include them in the analysis would require a different underlying macroeconomic model than that specified for SABs and EFFs. Third, 1987 was the first full year of operation for the SAF and 1988 for the ESAF. Only SBA and EFF programs were operational throughout the entire time period examined here. See Polak (fn. 6, 1991); and Schadler SusanBennett AdamCarkovic MariaDicks-Mireaux LouisMecagni MaruoMorisink James H. J., and Savastano Miguel A, “IMF Conditionality: Experience under Stand-By and Extended Arrangements. Part I: Key Issues and Findings,” IMF Occasional Paper, no. 128 (1995). Compared to the number of SBAs and EEFs, there have been few SAF and ESAF loans made. Regressions run on a variable including all of these programs together yielded results generally consistent with those reported in the following section.

54 Logit transforms this variable, which has a nonlinear relationship to the independent variables, into the log-odds of receiving a loan, which has a linear relationship to the independent variables. The new dependent variable, or logit, is then regressed on the independent variables using maximum likelihood estimation (MLE). Data for this variable were gathered from IMF, Annual Report (Washington, D.C.: IMF, various issues).

55 All economic variables except ratios are expressed in millions of 1990 U.S. dollars, using the 1990 U.S. GDP deflator reported in IMF, International Financial Statistics Yearbook. (Washington, D.C.: IMF, various issues).

56 These variables make the figures for large and small countries more comparable. I also tested the ratio of balance of payments to GNP and the change in that ratio with the same substantive results. Data are from IMF, International Financial Statistics Yearbook (Washington, D.C.: IMF, various issues).

57 The World Bank's debt ratios (DEBT/GNP, INT/GNP, and RES/DEBT) appear to have been multiplied by 100. To make comparisons across units consistent, I multiplied the CACCT/GNP ratios calculated from (but not listed in) World Bank data by 100. World Bank, World Debt Tables (Washington, D.C.: World Bank, various issues); and idem, Global Development Finance (Washington, D.C.: World Bank, various issues).

58 These figures are from the World Bank, World Debt Tables (Washington, D.C.: World Bank, various issues); and idem, Global Development Finance (Washington, D.C.: World Bank, various issues); with population data taken from IMF, International Financial Statistics Yearbook (Washington, D.C.: IMF, various issues).

59 Adequate data on the exposure of U.S. banks in particular countries are unavailable. In any event, the largest creditor banks are likely to be based in the U.S. and the IMF's other principal shareholder countries.

60 A variable measuring the total number of cancellations that a country experienced from 1975 through t-1 did not yield statistically significant results. Data were gathered from IMF, Annual Report (Washington, D.C.: IMF, various issues).

61 Data are from IMF, Direction of Trade Statistics Yearbook (Washington, D.C.: IMF, various issues).

62 Data have been taken from the U.S. Department of Commerce, Survey of Current Business, various issues.

63 Using these annual reports, I coded votes in agreement with the U.S. 1.0, votes in disagreement with the U.S. 0.0, and abstentions or absences by the sample country 0.5.1 then added and divided these numbers by the total number of key votes each year to come up with the annual decimal measure for each country. This method differs slightly from the technique of discarding absences and abstentions from the total count of UNGA votes used in Kegley Charles W. Jr. and Hook Steven W., “U.S. Foreign Aid and U.N. Voting: Did Reagan's Linkage Strategy Buy Deference or Defiance?” International Studies Quarterly 35 (September 1991). Rather than not count those nonvotes on “key” issues, I interpret them as neutral.

64 The transmission of United States foreign policy preferences from the State Department is not necessarily direct in the case of the multilateral development banks and the IMF, where Treasury plays a critical role. See Schoultz (fn. 10). The (American) deputy managing director has typically been “a ‘Treasury man,’ reinforcing the close ties between that agency of the U.S. government and the IMF.” Kahler (fn. 16), 94. Furthermore, Kahler argues that Treasury maintains tight control over U.S.-Fund relations and that “other agencies that might attempt to politicize the IMF for broader foreign policy goals tended to be excluded from direct access to it.” Kahler (fn. 16) 94, 97. On the other hand, Joanne Gowa notes that Treasury has adopted an ordering of priorities that “subordinates the demands of the international monetary order to the imperatives of domestic economic policy and foreign security policy,” suggesting some coordination—or at least compatibility—between different agencies within the executive branch. Gowa , Closing the Gold Window: Domestic Politics and the End ofBretton Woods (Ithaca, N.Y.: Cornell University Press, 1983). The present analysis of policy output (as opposed to interagency input) is an indirect test of these two competing hypotheses. Future work should address the interagency dynamics more directly.

65 U.S. Department of State, Report to Congress on Voting Practices in the United Nations (1985), 2.

66 Ibid., 4.

67 See Soo Kim Yeon and Russett Bruce, “The New Politics of Voting Alignments in the United Nations General Assembly,” International Organization 50, no. 4 (1996); Holloway Steven K. and Tomlinson Rodney, “The New World Order and the General Assembly: Bloc Realignment at the UN in the Post-Cold War World,” Canadian Journal of Political Science 28, no. 2 (1995); Pallansch Leona and Zinni Frank Jr., “Demise of Voting Blocs in the General Assembly of the UN? A Multidimensional Scaling Analysis” (Paper presented at the annual meeting of the Southern Political Science Association, Atlanta, 1996); Tomlin Brian W., “Measurement Validation: Lessons from the Use and Misuse of UN General Assembly Roll-Call Votes,” International Organization 39, no. 1 (1985); and Menkhaus Kenneth J. and Kegley Charles W. Jr., “The Compliant Foreign Policy of the Dependent State Revisited: Empirical Linkages and Lessons from the Case of Somalia,” Comparative Political Studies 21, no. 3 (1988).

68 Ed Lansdale, “Memo Re: Long Range Impact FPF-II,” April 24, 1964, National Archives, Record \ Group 59, Lot file 67D554, Under Secretary for Political Affairs, Records of the Special Assistant ] 1963–65, Box 2.1 thank Tim McKeown for providing me with a transcription of this document.

69 For example, Argentina sent troops to the 1991 Persian Gulf conflict. Escudé Carlos, “Entrevista i a Escude realizada por Lorena Kniaz” (1997), cited May 19, 1999,

70 Ibid.

71 Ibid.; Escudé Carlos, E-mail from the author, February 16, 1999.

72 Because of the UNGA's voting calendar, the voting variables have a longer lag structure than the economic variables. The fact that UNGA votes are taken in the last four months of the calendar year means that there is a 67 percent chance that a given loan decision will be made before the UNGA meets in a given year. The chances that such a decision will be made before the session is complete and final votes are tallied approaches 100 percent. Conversely, movement at t-1 occurs immediately before the next calendar year's loan cycle begins.

73 Stimson James A., “Regression in Space and Time: A Statistical Essay,” American Journal of Political-Science 29, no. 4 (1985); Beck NathanielKatz Jonathan N., and Tucker Richard, “Taking Time Seriously: Time-Series-Cross-Section Analysis with a Binary Dependent Variable,” American Journal Political Science 42, no. 4 (1998).

74 This assumes a Chi Square distribution for the −2 ⋉ LLR figure. While this assumption may not be entirely valid for individual level data, the strong results are still encouraging.

75 Beck, Katz, and Tucker (fn. 73). This approach is designed for longitudinally dominant data with typically twenty or more time periods. The authors have not yet tested this exploratory method on shorter time periods like the one used here (T = 10). Richard Tucker, conversation with the author, August 1998. We may therefore have somewhat less confidence in a negative diagnostic for autocorrelation than in the positive one obtained here.

76 Conway (fn.25).

77 Per capita debt reached the 0.90 level of confidence, and the following variables attained the 0.99 level: the debt to GNP ratio, the interest to GNP ratio, the change in the interest to GNP ratio, and the ratio of reserves to debt. Curiously, the coefficient for debt to GNP is negative (all others are correctly signed). I have no explanation for this anomalous result, except to surmise that the impact of high relative levels of debt may be sensitive to the burden of repayment as captured by the interest to GNP ratio.

78 On the Mexican crisis, see Roett Riordan, “The Mexican Devaluation and the U.S. Response: Potomac Politics, 1995-Style,” in Roett , ed., The Mexican Peso Crisis: International Perspectives (Boulder, Colo.: Lynne Rienner, 1996).

79 Bird (fn. 1, 1995).

80 This result may be spurious. Bird suggests that requesting a loan from the IMF has a threshold effect; once a country requests one loan, it is more likely to request additional loans. Since any country that has a loan canceled has already crossed this threshold, it may be more likely to receive loans in the future. Bird (fn. 1, 1995).

81 Regressions were also run using each variable without the other, yielding similar negative results.

82 There was a possible collinearity problem with this variable. Specifically, it correlated strongly with MKVOTEit-t. Because the inclusion of the interactive term is likely to have inflated the standard error of the movement variable and because its inclusion did not significantly improve the model's fit, I did not retain it.

83 Because of the potential for omitted variable bias and the negative diagnostic for multicollinearity in the original specification, I have greater confidence in the results of the full model. I therefore present the refined model results for the interested reader but focus most of the substantive interpretations on the full model.

84 The change in the current account from t—1 to t is significant at the 0.95 level, and the ratio of the current account to GNP is significant at the 0.90 level. The unexpectedly positive coefficient for the change in the current account from t-1 to t could be due to the fact that an IMF loan at time t can itself cause an improvement in the balance of payments at time t.

85 I retained absolute alignment position here to facilitate a clearer comparison of the hypothetical scenarios and to create more difficult conditions for demonstrating the strength of the impact of political realignment. Omitting KVOTEit-2 would lower the probability for the static U.S. ally even more, relative to any country moving toward the U.S.

86 Killick (fn. 1), 128.

87 Killick (fn. 1).

88 See McKeown (fn. 48).

89 Only one developing country (China) is a permanent member of the Security Council, so we cannot use Security Council votes to measure alignment.

90 Data from World Bank, World Development Indicators 1998 (Washington, D.C.: World Bank, various issues); idem, World Debt Tables (Washington, D.C.: World Bank, various issues); and idem, World Bank Global Development Finance (Washington, D.C.; World Bank, various issues).

91 The results for some of the economic variables differ from those in Table 1. Given the smaller number of cases used in Table 4 (a result of data availability), I base my substantive interpretations on the results presented in Tables 1 and 3. Several intermediate and refined specifications yielded similar results.

92 Pallansch and Zinni (fn. 67).

93 Ruggie (fn. 2).

94 See McKeown (fn. 48).

95 See Kahler (fn. 16), 93

96 Cited in Butler Nick, The IMF, Time fir Reform (London: Fabian Society, 1982), 24.

97 Cf. Ruggie (fn. 2), chap. 1.

* A preliminary version of this paper was presented at the 1997 annual meeting of the American Political Science Association in Washington, D.C. I would like to thank Tim McKeown, Patrick Conway, William Bernhard, Mary Matthews, Dane Rowlands, the participants in the faculty research seminar in the Department of International Relations at Boston University, and the anonymous World Politics referees for their insightful comments and suggestions. Yvonne Ochoa and Jaya Badiga provided able research assistance. The usual disclaimers apply.

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