Abstract
Financial assistance provided by the International Monetary Fund (IMF) and other International Financial Institutions (IFIs) aims to help member countries reduce their economic policy distortions. Because these distortions are endogenously generated, it is important to understand how IFI assistance interacts with the domestic political economy. In this paper, we review recent models of IFI conditional assistance that are based on the theory of special interest politics (Grossman and Helpman 2001). In these models, governments adopt inefficient economic policies and instruments because of lobbying by interest groups. IFI assistance helps reduce these inefficiencies, at least under perfect and symmetric information, and provided IFIs are representative of the general public in creditor and debtor countries. Factors limiting the effectiveness of conditional assistance as an incentive system are also identified. These are related to information asymmetries, the potential for political instability in debtor countries, and the IFIs’ own financial solvency.
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Notes
Paragraph 4 of the 1979 Conditionality Guidelines states that “the Fund will pay due regard to the domestic social and political objectives, the economic priorities, and the circumstances of members, including the causes of their balance of payments problems.”
The relationship between the legal foundations of conditionality and approaches that focus on its incentive effects is similar to the one between the body of laws that govern an industry and the economic approach to regulation (or, more generally, to the law). In both instances, the tools of microeconomics, industrial organization and game theory are employed to inform our understanding of the economic effects of laws, regulations and treaties on firms, regulators, countries and international organizations.
This assumption is plausible in light of the IMF’s global membership and responsibilities. In particular, the need to contain the national and international spillover effects of competitive exchange rate devaluations, tariffs and other inappropriate policies was the key reason behind the creation of the IMF in 1944. What is important though is not the precise specification of the IMF’s objective but rather the general method provided by the theory. Conditional loans could be analyzed using narrower objective functions for the IMF.
See Grossman and Helpman (2001, p. 228) for a complete characterization of contribution schedules. They note that these schedules are an abstraction from reality, that interest group offers are implicit and vague—not rigid contracts—and that they are enforced for reputational reasons.
Lack of domestic capacity is another reason why programs may fail to be implemented. Programs designed by foreign experts may lack ownership if they are not understood by the rank and file. Although very important in practice, issues of skill deficits in poor countries and of the role of capacity-building are beyond the scope of this paper.
The Guidelines state that “the Fund will encourage members to seek to broaden and deepen the base of support for sound policies in order to enhance the likelihood of successful implementation.” But while intended to help build ownership, linking IMF assistance to the adoption by countries of participatory processes is not without controversy. Some developing countries have complained that such processes may effectively weaken ownership by circumventing their democratically-elected executive branch.
This account handles most transactions between the IMF and its member countries, including their capital subscriptions, IMF loan disbursements, repayments and interest charges, and the IMF’s payment of interest and its repayments of principal to creditor countries.
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The views expressed in the paper are those of the authors and should not be attributed to the IMF, its Executive Board, or its management. Jim Boughton, Peter Isard, Leslie Lipschitz and Tessa van der Willigen provided useful comments on an earlier draft.
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Mayer, W., Mourmouras, A. IMF conditionality: An approach based on the theory of special interest politics. Rev Int Organ 3, 105–121 (2008). https://doi.org/10.1007/s11558-007-9023-0
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DOI: https://doi.org/10.1007/s11558-007-9023-0