Impact of IMF Programs on Perceived Creditworthiness of Emerging Market Countries: Is There a “Nixon-Goes-to-China” Effect?

Abstract

This article examines whether the impact of International Monetary Fund (IMF) programs on the perceived creditworthiness of a country is conditional on government partisanship. Left-of-center governments tend to suffer from greater credibility problems in financial markets than right-wing governments, because they are typically believed to pursue expansionary policies and have less respect for debt obligations. Applying the conventional wisdom held as “Only Nixon can go to China,” I argue that adopting IMF programs can benefit leftist governments more than other types of governments. The logic of the Nixon paradox implies that market-oriented reforms have greater credibility when implemented by a left-of-center party, whose ideologies do not accord well with the IMF's neoliberal policies, than when implemented by a right-wing party. This is because market participants interpret the action by a leftist government as driven more by a willingness to commit to market-oriented reform than by ideological affinity. Using sovereign credit rating data for almost 90 emerging market countries from 1980 to 2004, I find robust evidence consistent with the “Nixon-Goes-to-China” hypothesis. The findings suggest that adopting IMF programs improves the perceived creditworthiness of leftist governments, whereas no such benefit is found among non-leftist governments.