International Monetary Fund

Question 1

Conditionally - Stone

Answer 1

The Principle-Agent Approach
1. Agents (IMF staff) have incentive to lend money to
justify its budget and increase organizational slack
- An out-of-control agency leads to only enforcing in important countries, where crises might destabilize the financial system, and where the principals are willing to monitor
- Otherwise the agents just give money out to justify why they have it

2. Principals (powerful countries) intervene to prevent enforcement to benefit “their allies”
   - Interfering principals fail to enforce conditions in the countries of greatest interest, where the temptations are most compelling

Results
- Principles intervene to reduce conditionality and weaken the enforcement
- U.S. aid reduces conditionality but only if the borrower is vulnerable
- Vulnerability has no effect on conditionality independent of U.S. aid

Criticisms
Omitted variable, maybe the reason that US aid reduces conditionality is because the US imposes their own conditions on these restrictions, or the US only gives aid to countries with certain restrictions already in place
-Or maybe the reason why the IMF is underwhelming on growth is because the actual conditions they are imposing are bad and don’t improve economic growth

Question 2

Systemic Considerations - Pop-Eleches

Answer 2

Do systemic variables matter?
1. When debt crises are severe and threaten international financial stability
- Economically important countries receive preferential IMF treatment, ex. Latin American crisis, Western banks were exposed

2. When threats to international financial stability are low
   - Preferential treatments reflect a mix of motives,
   like preferences of main shareholders, ex. Eastern European countries in the 90s

-Partial support of the out-of control agency prediction, though no test on enforcement of IMF conditionality

Question 3

Moral Hazard

Answer 3

• Banks believe that the governments will bail them out if they suffer large losses, so banks have little incentive to carefully evaluate the risks associated with loans
• If loans are repaid banks will earn money, if not the government will rescue them
• This leads to weak financial institutions and banking regulations

Question 4

Dissatisfaction Towards the IMF

Answer 4

• Failure to warn of crisis on the horizon
• Places too much blame on policy errors
• “One size fits all” policy prescriptions
• Intrusive conditionality perceived to worsen crisis
• Unrepresentative / unjust governance

Question 5

What shapes IMF behaviour?

Answer 5

1. Shareholders
   - Policy interference in the case of policy allies and realignment
   - Results in more access to loans, more generous loans, less stringent conditionality, less enforcement of conditionality
2. IMF Staff
   - Bureaucratic perspective with budget and mandate maximization, principle-agent problem
   - Constructivist perspective with organizational culture and IMF as a transmitter of norms
3. Borrowing countries
   - IMF loans could “tip the balance” against domestic opponents, and the loans could be used as a signalling device

Question 6

Why does the IMF fail? - Vreeland

Answer 6

• Program participation lowers growth rates for as long as countries remain under a program
• Once countries leave the program, the grow faster than if they had remained
• But do not grow faster than if they had not joined
• IMF prescribes the wrong policies
• Imposes the same policies to different economies and different crises
• Selection bias
• Borrowing countries do not comply with IMF conditionality

Criticism
- There is a selection effect, the only countries that join the program are those that need help, so their economies were already suffering, and they leave the program when they start to recover

Question 7

Lack of Enforcement in the IMF

Answer 7

Principle-Agent approach
1. Agents (IMF staff) have incentive to lend money to justify their budget and increase organizational slack
- Leads to an out of control agency, where they give money to many countries with lax conditions in unimportant situations, and only enforce conditions in important countries where principals are willing to make an effort to monitor the Fund’s performance

2. Principles (powerful countries) intervene to prevent consistent enforcement in order to benefit their “allies”
   - Principles fail to enforce conditions in countries of greatest interest to the leading donor countries, where temptations are most compelling

Question 8

The Importance of Domestic Politics - Caraway

Answer 8

Does the strength of labour unions in a country affect the amount of labour conditions imposed by the IMF?

Two examples
1. South Korea: strong trade unions and few labour conditions
2. Bolivia: weak trade unions due to privatization, intrusive labour conditions

Results
- When labour unions are strong labour conditionality is minimal because the IMF knows that these countries will not be able to enforce it anyway, so low conditionality and weak compliance
- When it comes to conditionality, domestic politics of borrowers is taken into account by the IMF

Criticism
- Maybe the reason why the IMF is not preforming well with growth in this case is because the conditions they are imposing are not beneficial
- It is not that countries are not following the conditions, rather that the conditions themselves are bad