IMF Conditionality as Investment Regulation: A Theoretical Analysis

Abstract

The International Monetary Fund (IMF) was created in 1944 to administer a codified system of fixed exchange rates, and thereby promote a more stable world. In the 1970s, fixed exchange rates were abandoned, leading the IMF to seek new tasks. The IMFs modern role is as a long-term lender to developing countries with chronic balance of payments problems. The IMFs prime tool of influence is conditionality: the provision of credit only where the debtor country meets certain criteria, or enacts certain policies. This article examines the intersection between the IMFs conditionality policies and foreign investment. Although not designed to regulate foreign investment, the IMF has often required capital liberalization as a condition of credit. This article explores the implications of such conditionality and finds it problematic. Investment conditionality is outside the IMFs mandate, difficult to reconcile with existing instruments of investment regulation, inimical to democracy and ineffective at ensuring stable change. These conclusions urge a reconsideration of the governance and operations of the IMF, both in relation to foreign investment, and generally.