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The institutional failures of International Monetary Fund conditionality

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Abstract

The purpose of this paper is to propose an analytical framework integrating the diverse explanations of the failure of IMF conditionality. The IMF is a key player in the running of markets in a global economy. The institutional failures of IMF conditionality are appreciated at two complementary levels: (a) its intrinsic bureaucratic bias, and (b) the inability of the IMF to manage the institutional change required for the development of market processes. A new approach of conditionality suggests the separation of the role of the IMF as financial backer from its role as adviser to countries confronted by the globalization process.

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Notes

  1. See also, Goldstein (2000) and IMF (2001a) for statistical data.

  2. After 1982, a steady increase in procedural conditionality can be observed.

  3. According to Article I of the Articles of Agreement, one of the purposes of the IMF is “to give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” In other words, the original conception of IMF lending was to allow countries to make an adequate trade-off between adjustment and financing.

  4. Mussa and Savastano (2000), for example, studied 615 IMF arrangements over the 1973–1997 period using a sample composed of 5 industrial countries and 121 developing countries. Their main result was that more than a third of IMF programs ended with disbursements of less than half of the support initially agreed to. An extensive empirical literature confirms this poor completion of IMF programs.

  5. See Goldstein (2000) and Dreher (2006) for an overview.

  6. Studying 77 developing countries between 1975 and 1999, Joyce (2006) shows that successful program implantation is affected by domestic political considerations, notably the degree of democracy, the degree of election competitiveness and the degree of political pluralism.

  7. Based on a sample of 106 countries that obtained IMF credit over the period of 1971–1997.

  8. For example, governments can use IMF credits to make foreign exchange interventions in order to sustain the exchange rate regimes after a monetary expansion.

  9. The determinants of the political connections are the following: country quota, the number of nationals amongst the IMF staff, and member country’s political and economic proximity to the IMF’s major shareholding countries. Each of these determinants exerts a significant influence on IMF loans.

  10. Decisions to lend are analyzed over the period of 1985–1994 for 87 developing countries.

  11. 38 countries over the period of October 1997–March 2003 are studied. The relationship between the US and the recipient country is identified through voting in the United Nations General Assembly. The two countries are considered as allies when they vote in the same direction.

  12. Their study uses two main statistical sources: a chronological study from 1958 to 1999; an econometric analysis over the period of October 1997–March 2003 for 206 IMF letters of intent concluded with 38 countries. “Conditionality increases when the demand for IMF credit grows relative to quota; (...) conditionality decreases or stagnates when the demand for IMF credit is weak or IMF quotas have been raised” (Dreher & Vaubel, 2004b: 10).

  13. The Managing Director and Deputy Managing Directors.

  14. Svensson (2003) confirms this result using data from around 200 structural adjustment programs from the World Bank over the period of 1980–1995.

  15. Vaubel (1991) has made a similar suggestion.

  16. IMF Press Release, no. 03/207, November 26, 2003.

  17. As suggested, among others, by the Advisory Commission.

  18. Adopting a different perspective, Willett (2005) suggests separating IMF programs into two major categories: a short-term facility with ex ante conditionality, and structural conditionality.

  19. This argument naturally rests on the idea that the knowledge disseminated by institutions is of a stabilizing nature, in that it reaffirms the stability of the social structure at regular intervals, unlike that disseminated by the price system, which is of a dynamic nature in that it leads individuals to revise their plans continually (Hayek, 1945).

  20. “SBMs are indicators which aim to delineate the expected path of reform for individual structural policy measures and that can facilitate the evaluation of progress for these actions. Because many structural policies cannot be expressed in quantitative form, structural benchmarks are usually expressed qualitatively; for example, if the program calls for privatization of the state-owned telephone company, submitting the privatization bill to the legislature by date x could be one structural benchmark. Failure to meet structural benchmarks conveys a negative signal but does not automatically render a country ineligible to draw; instead, a decision about eligibility would be judgmental and would likely be made in a broader mid-year program review—itself an instrument of conditionality—with an eye toward the country’s overall progress on the structural front” (IMF, 2001c).

  21. “The majority of structural conditions—between a half and two thirds—have been, and continue to be, concentrated in a relatively small number of sectors that are at the very core of the Fund’s involvement in member countries: exchange and trade systems, and fiscal and financial sectors. The relative importance of these sectors has changed, with reforms in the exchange and trade system now playing a smaller role and the financial sector a more important one than in the early 1990s. In addition, public enterprise restructuring and privatization—in part motivated by fiscal considerations—have accounted for about one fifth of the structural conditions in Fund-supported programs. Nevertheless, while a large part of structural conditionality has focused on a relatively small number of sectors that are closely linked to stabilization and external adjustment, this does not guarantee that structural reforms have always been adequately prioritized nor does it imply that too broad a reform agenda has never been an issue” (IMF, 2001a).

  22. Only this latter type of change is likely to disrupt some plans in the course of action.

  23. Numerous empirical studies have established this relationship. See Collier et al. (1998).

  24. IMF defines ownership as follows: “ownership is a willing assumption of responsibility for an agreed program of policies, by officials in a borrowing country who have the responsibility of formulating and carrying out those policies, based on an understanding that the program is achievable and is in the country’s own interest” (IMF, 2001b: 6).

  25. A detailed presentation of this approach is beyond the scope of this paper. See, among others: Leandro et al. (1999); Collier et al. (1997); Collier et al. (1998); Khan and Sharma (2006).

  26. In 1999, the IMF and the World Bank initiated the Poverty Reduction Strategy Papers which give a greater degree of initiative to governments in low-income countries. Indeed, PRSPs are prepared by governments according to a participatory process involving domestic stakeholders. A PRSP describes the macroeconomic, structural and social policies and programs adopted by a country for several years (IMF, 2003a). In August 2006, 78 countries were eligible for the Poverty Reduction and Growth Facility. The last IMF review available (September 2005) shows that 49 full PRSPs have been circulated to the Fund Executive Board and an additional 11 countries have completed “interim” PRSPs. Although it is too early to evaluate them, preliminary assessments have stressed the participatory gap after the adoption of the programs and the conflicts between their multiple objectives, revealing the difficulty in adopting a clear priority order. For an external evaluation of PRSP, see Killick (2002) and Independent Evaluation Office (2005a); for an internal evaluation, IMF (2003b).

  27. For instance, see Lane et al. (1999); Baliño et al. (2000).

  28. For an overview of the relationship between low-income countries and IMF, see for instance Lombardi (2005); Martin and Bargawi (2005).

  29. See the recent World Bank study (World Bank, 2005) and Rodrik (2006).

  30. Nigeria has been the first IMF-member to use PSI in October 2005.

  31. The duration is between 1 year and 3 years with a maximum of 4 years.

  32. Bevan (2005) voices several doubts regarding the traditional link between policy advice and financing. Such a separation could apply to the World Bank too. On World Bank conditionality, see Dreher (2004).

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Acknowledgement

We would like to thank all participants for their remarks and suggestions. The paper benefited greatly from careful readings by the two referees of the Review and the editor Axel Dreher. We thank Pauline Boerma-Collier for her very useful assistance. Usual caveats apply.

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Authors and Affiliations

  1. École Normale Supérieure Lettres et Sciences Humaines GATE—CNRS, University of Lumière Lyon 2, Bureau R131 15, Parvis René Descartes, BP 7000, 69342, Lyon cedex 07, France

    Jean-Pierre Allegret

  2. University of Auvergne Clermont 1, CERDI—65 boulevard François Mitterrand, 63000, Clermont Ferrand, France

    Philippe Dulbecco

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Correspondence to Jean-Pierre Allegret.

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Allegret, JP., Dulbecco, P. The institutional failures of International Monetary Fund conditionality. Rev Int Org 2, 309–327 (2007). https://doi.org/10.1007/s11558-006-9003-9

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