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Foreign aid and global governance: Buying Bretton Woods – the Swiss-bloc case

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Abstract

Power in the world’s preeminent international financial institutions—the World Bank and the International Monetary Fund—resides in their Executive Boards. How do governments get elected to these international committees? This study quantitatively explores whether wealthy governments provide more foreign aid to poor governments that offer them political support. The focus is on Switzerland, which is elected to the Executive Board of the Bretton Woods Institutions by a group of countries from Central and Western Asia, and Eastern and Southern Europe. Results confirm the hypothesis. Implications for governance in a multipolar world are discussed.

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Notes

  1. The literature is vast. References that have particularly influenced this study include: Bearce and Tirone (2010), Bermeo (2008), Biglaiser and DeRouen (2010), Broz and Hawes (2006), Burnside and Dollar (2000), Bueno de Mesquita and Smith (2007), Dreher et al. (2009, 2010), Dunning (2004), Easterly (2006), Hawkins et al. (2006), Isopi and Mattesini (2010), Kilby (2006, 2009, 2011), Kuziemko and Werker (2006), Lancaster (2008), Marchesi and Missale (2004), McKeown (2010), Milner and Tingley (2010), Moser and Sturm (2011), Mosley et al. (1991), Oatley and Yackee (2004), and Schneider and Tobin (2010). For work on small donors, see Neumayer (2003a, b).

  2. I am grateful to conference participants Peter Bernholz and Jan-Egbert Sturm for elaborating on the importance of Swiss domestic politics surrounding this issue, which received extensive coverage in the Swiss media.

  3. Economic weight is not straightforward to measure. In 2008, the IMF made their “quota” formula public but not the weights and measurements for all of the specific components. See: http://www.imf.org/external/np/exr/ib/2008/040108.htm. For a recent study of the impact of quotas on foreign reserves, see Joyce and Razo-Garcia (2011).

  4. See Mikesell (1994: 22). As the Soviet Union never joined, this did not quite work out.

  5. See Strand and Rapkin (2005) for an interesting discussion.

  6. These numbers have grown over time and are subject to change.

  7. Considering that most emerging market countries are under-represented, it may seem strange to see Saudi Arabia among the top vote-holders. This country saw its vote-shares increase dramatically in the petro-boom of the 1970s.

  8. See IMF (various years).

  9. Studies of the importance of winning Directorships on the Executive Boards of the BWIs include Woods and Lombardi (2006), Momani (2008), and Kaja and Werker (2010). For a study of the dispersion of vote-shares—and thus loss of accountability—on the Executive Boards, see Vaubel (1986, 1996). On the question of accountability and the new transparency, see Weaver (2009, 2010). For a comprehensive review of the effectiveness of the IMF, see Conway (2006).

  10. See http://www.un.org/en/members/#s.

  11. Montenegro split from Serbia in 2006 and joined the Netherland’s BWI bloc in the 2008 elections. Serbia stayed with the Swiss. Below, I mostly refer to “Serbia and Montenegro” as simply “Serbia.” Note that in 2005, Swiss aid to Serbia and Montenegro was about US$48 million. In 2006, when the country split, Swiss aid shot up to US$99 million for Serbia, but was only US$1.4 million for Montenegro. In 2007, aid to Serbia returned to US$47 million, while Montenegro’s aid dropped to less than US$300,000. Considering that Montenegro accounts for nearly 10% of the population of Serbia, this is hardly an even split of the money coming from Switzerland. And it is not obvious which of the two countries has a higher level of development in 2006 (according to real and purchasing power parity measures). Interestingly, compared to the US$300,000 in aid from Switzerland, the Netherlands provided about one million in aid to Montenegro in 2007.

  12. The data are available from: http://stats.oecd.org and include ODA to developing countries (Part I) and Official Assistance to countries in transition (Part II). Note that this study was originally conducted using Aiddata. See Findley et al. (2009) and http://www.aiddata.org.

  13. For the log of aid, I deal with zeros (and hence the undefined log of 0) by adding a small constant (one) so that I can keep the zero-observations (see Ball and Johnson 1996, Fleck and Kilby 2006b, Alesina and Dollar 2000, Bandyopadhyay and Wall 2007, Boschini and Olofsgård 2007, Kuziemko and Werker 2006). Fleck and Kilby (2010: 186, fn3) explain that there is not universal agreement on this. Other approaches include estimating a tobit model (e.g., Alesina and Dollar 2000), estimating a Heckman selection model (e.g., Drury et al. 2005), and estimating other two part models (Berthélemy and Tichit 2004, Fleck and Kilby 2006a, Kilby 2006, Neumayer 2003c).

  14. I consider only independent regimes, using the criteria of Cheibub et al. (2010). Countries that are not covered by the DAC are dropped from the analysis. The countries covered by the DAC that are not reported to receive Swiss aid during 1990–2008 are: Antigua and Barbuda, Bahamas, Bahrain, Brunei Darussalam, Guyana, Kiribati, Kuwait, Nauru, Palau, Qatar, Saudi Arabia, Solomon Islands, St. Kitts and Nevis, St. Lucia, Suriname, Tonga, Tuvalu, and United Arab Emirates.

  15. The picture is similar when Poland is included by raising the income threshold to US$6,500: average aid to non-members averages US$6.7 million, while aid to Swiss-bloc members averages US$11.3 million.

  16. Following the United States, Japan, Germany, United Kingdom, France, Italy, Canada, Spain, Korea, Australia, Netherlands, and Sweden.

  17. The currencies throughout the article are measured in constant 2000 US$, unless otherwise noted.

  18. I am grateful to Christopher Kilby for this suggestion.

  19. Some models do not converge using indicators for every separate year. Thus, I include years together in groups of four to create a series of indicators. This also addresses the incidental parameters problem. I do the same for the linear models below. I am grateful to Jamus Lim for this suggestion. On the question of aid volatility over time, see Lensink and Morrissey (2000) and Desai and Kharas (2010).

  20. As Fleck and Kilby (2010: 186 fn3) again explain, there is “some but not universal agreement on the appropriate econometric specification.” Trumbull and Wall (1994) advocate the country fixed-effects approach, though this is problematic when dealing with time invariant characteristics of countries.

  21. A related possibility is that Switzerland may have increased its foreign aid for all countries that joined the BWIs in the 1990s. To test this, I construct an additional indicator-variable coded 1 for all country-years that joined with Switzerland in 1992 or subsequently. Note that Post-Communism and post-1992 BWI membership cannot be included together due to multicolinearity. When I use the post-1992 variable instead of the Post-Communist indicator, the results for the Swiss-bloc variable hold qualitatively. These results are available on request.

  22. The threshold is obviously arbitrary, and the results do not depend on this.

  23. See, for example, the New York Times article, “Swiss Ban Building of Minarets on Mosques” http://www.nytimes.com/2009/11/30/world/europe/30swiss.html. For a study of the interaction of immigration and foreign aid flows, see Bermeo and LeBlang (2010).

  24. I am grateful to Ngaire Woods for raising this question.

  25. In terms of nominal GDP, the Netherlands is the next larger Western European economy after Switzerland, and Belgium is the next smaller economy. According to the IMF World Economic Outlook Database (April 2010), in 2009, the nominal GDP in current US$ was estimated to be nearly US$800 billion for the Netherlands, nearly US$500 billion for Switzerland, and about US$470 billion for Belgium.

  26. The actual sum of aid to the Swiss-bloc in 2008 was US$94 million (12% of total Swiss ODA, US$758 million). Part of this amount was due to numerous other factors—and part, indeed, because of their membership in the Swiss-bloc.

  27. On the effectiveness of representation, it is noteworthy that the Swiss maintain their Directors for only a few years at a time. At the IMF, for example, from 1993 to 2008 there were four different Swiss Directors. This contrasts with Directors with many years of experience, like Iran’s highly respected Abbas Mirakhor (1992–2008).

  28. Bern, Switzerland, 17 November 2004. See http://www.evb.ch/en/p25003203.html.

  29. See Rapkin and Strand (2003, 2005, 2006), Buira (2005), Woods (2005), and Woods and Lombardi (2006). For a broader perspective on multiple institutions, see Bernholz (1985). For a recent discussion, see Desai and Vreeland (2011).

  30. The Memorandum of Understanding was signed 3 September 2010. See the Swissinfo.ch article, “Kazakhstan joins Swiss IMF constituency” http://www.swissinfo.ch/eng/business/Kazakhstan_joins_Swiss_IMF_constituency.html?cid=28267148.

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Acknowledgements

I thank the following people who offered suggestions: Peter Bernholz, Marc Busch, Thane Clare, Raphael Cohen, Raj Desai, Jeff Donnithorne, Axel Dreher, Martin Gassebner, Nikhil Kalyanpur, Christopher Kilby, Michael Lamla, Jamus Lim, Rodney Ludema, Anna Maria Mayda, Ryan Powers, Dennis Quinn, Julia Shvets, Jan-Egbert Sturm, Michael Tierney, Jennifer Tobin, Erik Voeten, Jürg Vollenweider, Catherine Weaver, Thomas Willett, Garth Willis, Sven Wilson, Ngaire Woods, and, especially, the two anonymous referees. I am particularly indebted to Jessica Lawson, who offered detailed comments on the style and substance. I am also grateful to participants at the following conferences: The AidData Conference (University College, Oxford, March 22–25, 2010), The Mortara Center Research Workshop Series on the International Politics of the Financial Crisis (Georgetown University, May 6–7, 2010), The Egon Sohmen Memorial Conference (Tübingen, Germany, June 10–13, 2010), and The Silvaplana Workshop on Political Economy (Hotel Schweizerhof, Pontresina, Switzerland, July 24–28, 2010). This study was originally drafted for the PLAID Data Quality Workshop (Stimson Center, Washington, DC, September 17–18, 2009).

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Table 5 Current Bretton Woods Blocs

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Vreeland, J.R. Foreign aid and global governance: Buying Bretton Woods – the Swiss-bloc case. Rev Int Organ 6, 369–391 (2011). https://doi.org/10.1007/s11558-011-9111-z

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