Global horse trading: IMF loans for votes in the United Nations Security Council

We investigate whether temporary members of the United Nations Security Council receive favorable treatment from the International Monetary Fund (IMF) using panel data for 197 countries over the period from 1951 to 2004. Our results indicate a robust positive relationship between temporary Security Council membership and participation in IMF programs, even after accounting for economic, political, and country-specific factors. There is also evidence that Security Council membership reduces the number of conditions included in IMF programs. IMF loans seem to be a mechanism by which the major shareholders of the Fund can win favor with voting members of the Security Council.     

The effects of IMF conditional programs on the unemployment rate

The fundamental mission of the International Monetary Fund (IMF) is to ensure global financial stability and to assist countries in economic turmoil. Although there is a consensus that IMF-supported programs can have a direct effect on the labor market of recipient countries, it remains unclear how IMF participation decision and conditionalities attached to IMF loans can affect the unemployment rate of borrowing countries. Using a world sample of countries from 1980 to 2014, we investigate how lending conditional programs of the IMF affect the unemployment rate. Our analyses account for the selection bias related to, first, the IMF participation decision and, second, the conditions included within the program. We show that IMF program participation significantly increases the unemployment rate of recipient countries. Once we control for the number of conditions, however, we find that only IMF conditions have a detrimental and highly significant effect on the unemployment rate. There is evidence that the adverse short-run effect of IMF conditions holds robust in the long-run. Disaggregating IMF conditionality by issue area, we find adverse effects on the unemployment rate for four policy areas: labor market deregulation, reforms requiring privatization of state-owned enterprises, external sector reforms stipulating trade and capital account liberalization, and fiscal policy reforms that restrain government expenditure. Our initial results are found to be robust across alternative empirical specifications.     

The IMF and the Liberalization of Capital Flows

We evaluate the claim that the International Monetary Fund precipitated financial crises during the 1990s, by pressuring countries to liberalize their capital accounts prematurely. Using data from a panel of developing economies from 1982–98, we examine whether the changes in the regime governing capital flows took place during participation in IMF programs. We find evidence that IMF program participation is correlated with capital account liberalization episodes during the 1990s. We verify the robustness of our results using alternative indicators of capital account openness. To determine whether decontrol was premature, we compare the economic and financial characteristics of countries that decontrolled during IMF programs with those of countries who did so independently, and find some evidence of IMF-led premature liberalizations.     

The liberalization of trade and foreign direct investment: a political economy analysis

Abstract

In theory, the IMF could influence fiscal and monetary policy via several channels, among them advice to policy makers, conditionality, and the moral hazard it induces with the borrowers. This article tries to disentangle those effects empirically. Using panel data for 98 countries over the period 1975–2000 it analyzes whether IMF involvement indeed influences fiscal and monetary policy in program countries. There is evidence that participation in IMF Standby and Extended Fund Facility arrangements improves economic policy. Money disbursed and the degree to which a program is implemented does not have any systematic influence. The same is true for future availability of resources as measured by exhaustion of a country’s quota with the Fund. The final section discusses policy implications.     

WHICH VARIABLES EXPLAIN DECISIONS ON IMF CREDIT? AN EXTREME BOUNDS ANALYSIS

This paper analyses which economic and political factors affect the chance that a country receives IMF credit or signs an agreement with the Fund. We use a panel model for 118 countries over the period 1971–2000. Our results, based on extreme bounds analysis, suggest that it is mostly economic variables that are robustly related to IMF lending activity, while most political variables that have been put forward in previous studies on IMF involvement are non-significant. To the extent that political factors matter, they seem more closely related to the conclusion of IMF agreements than to the disbursement of IMF credits.     

IMF conditionality,export structure and economic complexity:The ineffectiveness of structural adjustment programs

The conditionality requirements of the International Monetary Fund (IMF) have been a source of intense debate since the early 1980s. These conditions, which are attached to IMF lending programs, cover a variety of issues from fiscal and monetary reform to economic liberalization and institutional change. In this paper we empirically examined the effects of IMF programs and conditionality requirements on structural transformation through changes in the technology-and-skill intensity and overall economic complexity of exports. Our empirical methodology accounted for policy and conditionality heterogeneity across country and time and accounts for the endogeneity of IMF programs and conditions. The empirical results suggest that IMF programs and conditionality requirements along a spectrum of policy areas had no robust or significant effect on export structure, economic complexity or export diversification. Overall, we found no evidence of any positive effects of IMF programs or IMF conditionality requirements on the technology-and-skill intensity of exports.     

Time Past and Time Present: a Duration Analysis of IMF Program Spells*

The programs of the IMF were designed to provide short‐term assistance to countries with balance‐of‐ payments disequilibria. Over time, however, the Fund instituted new facilities with longer time horizons, while many countries adopted consecutive programs. As a result, the length of time spent by countries in IMF programs has grown. This paper analyzes IMF program spells for a group of developing economies over the period of 1982–2000. Duration models are used to investigate the time dependence of the spells and the factors that affect their duration. The hazard ratio of spells has a nonmonotonic shape, first rising and then falling. Spell duration is independent of previous spell length or the number of spells. Program duration is extended for countries with lower income, exports concentrated in primary goods, landlocked geographic status and autocratic regimes. Governments that are polarized have shorter spells, which may reflect a breakdown in governance.     

IMF conditionality and central bank independence

This paper studies the role of the International Monetary Fund (IMF) in promoting central bank independence (CBI). While anecdotal evidence suggests that the IMF has been playing a vital role for CBI, the underlying mechanisms of this influence are not well understood. We argue that the IMF has ulterior motives when pressing countries for increased CBI. First, IMF loans are primarily transferred to local monetary authorities. Thus, enhancing CBI aims to insulate central banks from political interference to shield loan disbursements from government abuse. Second, several loan conditionality clauses imply a substantial transfer of political leverage over economic policy making to monetary authorities. As a result, the IMF through pushing for CBI seeks to establish a politically insulated veto player to promote its economic policy reform agenda. We argue that the IMF achieves these aims through targeted lending conditions. We hypothesize that the inclusion of these loan conditions leads to greater CBI. To test our hypothesis, we use a recently available dataset on IMF programs that includes detailed information on CBI reforms and IMF conditionality for up to 124 countries between 1980 and 2012. Our findings indicate that targeted loan conditionality plays a critical role in promoting CBI. These results are robust towards varying modeling assumptions and withstand a battery of robustness checks.     

THE PUBLIC SECTOR IN FINANCIAL FLOW STATEMENTS: JAPAN'S CASE

One of the most characteristic features of Japan's public sector is the predominant role of the Treasury system, which operates not only budgetary funds of the central government but also various other funds such as Postal Savings Funds and surplus funds of public corporations.
Among the general account and 45 special accounts of the Treasury system, the Foodstuff Control, the Foreign Exchange Fund and the Trust Fund play important roles, both through their intra-governmental transactions and through their transactions with private sectors. Particularly noticeable is the role played by the Trust Fund Bureau, which serves as a financial institution for government agencies. Surplus and accumulated funds in the Postal Savings and other special accounts of the Government are deposited in the Trust Fund Bureau, which employs these funds for intra-governmental ways and means loans, and for government loans and investment programs.
Another feature of Japan's Treasury system is that it deposits all the Treasury funds solely with the Bank of Japan.
The activities of local authorities and local public enterprises are also largely financed by Treasury funds, and are intertwined with the Treasury system.
The statistical systems for monetary and financial flow analysis developed by the Bank of Japan, therefore, place stress on the analysis of flows of Treasury funds, and are based on an institutional sectoring to reflect the flows of funds as they actually take place. One exception is the Monetary Survey compiled in accordance with the IMF formula, which adopts a kind of functional sectoring for international comparison purposes.
In the last three years, Japan's public sector, which had long stood rather neutral in the financial patterns of the economy, has begun to show an increasing financial deficit. With the increasing financial deficit of the sector, the financial patterns of the nation as a whole are undergoing remarkable changes.     

Examining the effect of IMF conditionality on natural resource policy

Can International Monetary Fund (IMF) lending improve natural resource governance in borrowing countries? While most IMF agreements mandate policy reforms in exchange for financial support, compliance with these reforms is mixed at best. The natural resource sector should be no exception. After all, resource windfalls enable short-term increases in discretionary spending, and office-seeking politicians are often unwilling to forgo this discretion by reforming the oil, gas, or mining sector. I investigate how and when borrowers go against their political interests and establish natural resource funds—a tool often promoted by the IMF—in the wake of a loan agreement. Using text analysis, statistical models, and qualitative evidence from natural resource policy and IMF conditionality for 74 countries between 1980 and 2019, I show that borrowers under an IMF agreement are more likely to create or regulate a resource fund, particularly if the agreement includes binding conditions that highlight the salience of natural resource reforms. This study contributes to extant research by proposing a new method to extract information from IMF conditions, by introducing a novel dataset on country-level natural resource policy, and by identifying under what circumstances international reform efforts can help combat the resource curse.     

Worldwide impact of IMF policies during the Asian crisis: who does the IMF help,creditors or crisis countries?

This paper examines the effects of International Monetary Fund (IMF) policy announcements on financial markets worldwide. We investigate reactions from stock, bond, foreign exchange and futures markets and banking and financial companies during the Asian crisis. We explore the impact of IMF bailouts not only on crisis countries, but also on main creditor countries. We study the impact of local governments’ and public responses in crisis countries to account for interaction between the IMF and local parties. We show IMF involvement and local governments’ co-operation actually helps crisis countries but not creditors. We show that in crisis countries, financial markets generally react unfavourably to their governments’ initial demands for IMF assistance, while compliance of the crisis countries with the IMF policy action is commonly perceived as good news. Financial markets in crisis countries react negatively to prolonged negotiations and government actions against IMF policy. Creditor countries’ financial markets are not responsive to IMF actions in crisis countries. We discuss policy implications of findings.     

Is the pragmatic response to International Monetary Fund quotas and credit limits favourable?

Under the International Monetary Fund (IMF)’s recently developed pragmatic response, the amount a member can borrow is not determined by its quota. We consider two pragmatic responses that produce a Pareto improvement, compared with the IMF rule: one mandated by the IMF and the other related to the trade of the additional credit limit in the market. Both these responses indicate that the additional credit limit on top of the IMF rule should be positive (negative) for a country whose investment return is larger (smaller) than the average investment return across all IMF member developing countries. The rule for the IMF credit limit does not reflect the demand for credit, which induces inefficiency. The first pragmatic response, which has an appropriately small negotiation and distribution cost per unit incurred by the IMF, may dominate the second one.     

EXTERNAL MACROECONOMIC IMBALANCES AND FOREIGN DIRECT INVESTMENT INFLOWS TO DEVELOPING COUNTRIES

We employ relative size of International Monetary Fund (IMF) credit as a proxy for interdependent macro variables that are associated with external macroeconomic imbalances or balance of payment (BOP) crisis to investigate how they impact foreign direct investment (FDI) inflows. Relative size of IMF credit as a share of gross domestic product sends two mixed signals to multinational enterprises (MNEs). First, it is a signal that a country is facing an actual or potential BOP crisis. Second, countries that seek IMF credit typically agree to implement a set of “IMF conditionality” before financial credit is disbursed. This may signal to MNEs that policy reforms that must accompany IMF financial credit may result in ex ante positive economic outlook and stability. We find that relative size of IMF credit is negatively (positively) correlated with FDI inflows to developing countries below (above) a threshold value of economic freedom. The main implication of these findings is that MNEs may view developing countries with below average index of economic freedom as lacking institutional capabilities to implement recommended IMF policy reforms when faced with an actual or potential BOP crisis. Our results are robust across alternative model specifications and consistent with the theory of catalytic finance. (JEL F21, F23, F33)     

Financial Inclusion and Financialization: Latin American Main Trends after the Great Crisis

In recent decades, the World Bank (WB) and the International Monetary Fund (IMF) have promoted policies and programs for financial inclusion (FI). This article studies the meaning of the inclusion proposal as well as the main results. The most important argument of this policy is the increase of local savings as the basis of investment and growth. Although this objective has not been achieved, inclusion remains a current policy. In reality, FI has been driven by an underlying agenda, as has been the case of other policies from the same sphere of interests that the Washington Consensus authored at the beginning of the 1990s. Although this denomination has been abandoned due to the loss of prestige it has achieved in the region, its main objectives continue to be promoted by many governments. Also, FI has been a vehicle for deepening financialization.     

Communication and performance in Bank–Fund joint participation

In this paper I relate Bank–Fund performance to their willingness (or ability) to communicate. I find evidence that a Bank–Fund simultaneous loan is associated to an increase in economic growth and that such effect is diminished by factors preventing full communication, such as the degree of Bank-Fund competition and the salience of informational asymmetries. Politically motivated loans seem—at least to some extent—stimulate more IMF–WB interaction, which turns out to be associated to a better country’s performance.     

Do external interventions work? The case of trade reform conditions in IMF supported programs

Trade reform conditions are common in IMF supported programs. Of the 99 countries that had IMF programs during 1993-2003, 77 had trade reform conditions in their programs. Since the WTO has not been found especially effective in promoting trade openness for most developing countries, it is of great interest to see if the IMF has been more effective as it combines carrots and sticks not available to the WTO. Yet, the effectiveness of these trade conditions has not been systematically studied. Using a unique dataset, this paper provides such an assessment. It finds that trade conditions are indeed associated with an increase in trade openness on average, but the effect comes mostly from countries that can be characterized by a high degree of “willingness to reform.”     

Measuring the consequences of pension reform applying liquidation and longevity considerations

In seeking to understand IMF lending early large sample econometric studies tended to focus on economic factors. Political and institutional influences were often deemed to be reflected in the frequently large residual. At the same time increasing anecdotal evidence was being amassed to suggest that political factors were indeed important. However, more recent studies have claimed that, by using superior estimating techniques, a satisfactory explanation of Fund lending can be provided without needing to include political and institutional factors, which are in any case difficult to measure and model. This study shows that there is large sample evidence supporting the importance of some of these variables, though their contribution to predicting the pattern of IMF agreements is minimal. It goes on to discuss some of the implications of this for the Fund as the world's premier international financial institution.

The research upon which this paper is based was supported by the UK Department for International Development (DFID). While this support is gratefully acknowledged, the views and opinions expressed are those of the authors alone. Thanks to Chris Worswick and two anonymous referees for comments, and Connie Tulus and Helgi Maki for research assistance.     

Once Bitten: The Effect of IMF Programs on Subsequent Reserve Behavior

Traditional models have encountered problems in explaining the accumulation of international reserves, particularly in Asia, in the period since the late 1990s. One suggestion has been that countries have sought to self‐insure against future crises, either because of a perceived increase in the cost of crises or because of the perceived conditionality costs of using IMF credits. This paper offers an empirical investigation of these ideas, disaggregating across regions and across IMF facilities. We find that IMF programs have had a significant positive effect on subsequent reserve accumulation, allowing for other determinants, and that this effect endures over time. We also find that the effect differs between Latin America and Asia, and that it is not simply a phenomenon that is associated with the Asian crisis of 1997/98. The paper goes on to discuss the implications for the design of policy and for the reform of the IMF.     

Asian Currency Crisis and the International Monetary Fund, 10 Years Later: Overview*

This paper is an overview of the Asian currency crisis in Thailand, Indonesia, and South Korea in 1997–1998, with an emphasis on the role of the International Monetary Fund (IMF). It provides a detailed account of the development of the crisis and analyses and evaluates the content of IMF advice and its consequences. The size of the IMF package for each of these three countries is judged to have been too small. This paper also has a comparative perspective; the Mexican crisis is reviewed as a precursor to the Asian crisis to see what the IMF learned, and how it prepared, for future crises. The causes of the crises and IMF conditionality for the post‐Asian crisis countries, Russia, Brazil, Turkey, and Argentina, are also compared to the Asian crisis countries. By agreeing to maintain a fixed exchange rate, for example, the IMF is judged to have been “softer” in its approach to the post‐Asian crisis countries.     

Corruption and public finance: an IMF perspective

Public finance should be a means whereby governments in low-income countries are able to increase economic growth and end poverty. Corruption, however, reduces tax revenue and makes public expenditure policies ineffective for achieving social objectives. The papers in this volume, which is sponsored by the Fiscal Affairs Department of the International Monetary Fund (IMF), describe how corruption makes public finance ineffective in promoting economic development.