International Monetary Fund Conditionality Research Articles

Trade Liberalization, IMF Conditionality, and Policy Substitution in Developing Countries

AbstractSubstantial tariff reductions and increased usage of non‐tariff measures (NTMs) have been key dynamics of global trade policy in recent decades. We use highly disaggregated data on applied most favored nation tariffs, NTMs, and trade to investigate how International Monetary Fund (IMF) conditionality as a form of external pressure to reduce tariffs contributed to this dynamic in developing countries. Our results show that structural adjustment programs (SAPs) effectively lowered tariffs without increasing the usage of NTMs. A typical three‐year program containing tariff conditionality decreased tariff rates in the range of 2.0 to 3.8 percentage points in total. Furthermore, IMF programs reduced NTM initializations significantly. We also show that tariff conditionality was more effective in initiating tariff cuts for countries without previous greater globalization efforts than being a “catalyst” for ongoing liberalization efforts.

Conditionality in extreme circumstances: the IMF and emergency financing during the COVID-19 pandemic

The article highlights the shift in lending policy towards instruments without ex post conditionality by the International Monetary Fund (IMF) amid the COVID-19 pandemic in 2020. The objectives of the article are two-fold: Firstly, it aims to clearly indicate the shift of IMF lending policy towards instruments without conditionality in 2020; secondly, it complements the existing academic literature on changes in conditionality by testing three factors that contribute to the shift. It is concluded that similarly to the global financial crisis in 2008, more discretion was given to IMF staff to rapidly respond to the crisis and that the IMF staff increased the Fund’s power position in the global financial safety net through expanded lending. A novelty around the COVID-19 crisis is the change in the normative debate around conditionality, which intensified in the years before the pandemic, suggesting that a more permanent change in IMF conditionality policy is taking shape. Keywords: Conditionality, COVID-19, Emergency Financing, International Monetary Fund.

Why cronies don’t cry? IMF programs, Chinese lending, and leader survival

Many countries in the Global South have increased their exposure to Chinese debt in recent years. With the COVID-19 pandemic and the US interest rate hike, many countries have struggled to meet their debt repayment obligations. As a result, they have turned to the International Monetary Fund (IMF) for emergency assistance. We argue that the involvement of the Fund wipes out much of the political benefits of China loans for executive leaders of borrowing countries. IMF conditionality requires countries to increase fiscal transparency, which threatens the viability of kickback schemes and increases the likelihood that corrupt leaders will be called out on their misdealing. As a result, we expect corrupt leaders with China debt to leave office earlier when they try to address debt defaults with IMF loans than when they avoid them. Using survival analysis on a dataset of 115 developing countries between 2000 to 2015, we find that leaders indebted to China that go under an IMF program leave office earlier compared to when they do not go under an IMF program. In line with our argument, this effect is strongest in more corrupt regimes. Our argument and analysis contribute to understanding international finance’s political economy, specifically how mixing creditors can be politically risky for leaders.

Government Ownership of IMF Conditionality Programs: Conceptualization, Measurement, and Validation

Abstract The shifting emphasis on performance evaluation and accountability in the context of financial lending or foreign-aid arrangements sponsored by international organizations (IOs) has brought to the fore the question of government ownership of reforms. While the concept of ownership has featured highly in academic and policy debates over the effects of IO conditionality, it arguably remains theoretically elusive, ill-identified, and under-specified. In this article, we focus on International Monetary Fund (IMF) programs and define government ownership with respect to the counterfactual level of de jure structural reforms that would be achieved in the absence of IMF conditionality. We then use the synthetic control method to identify continuous levels of ownership as a function of a treatment effect on treated compliers and operationalize the concept of ownership over external- and financial-sector conditionality across a restricted sample of uninterrupted IMF arrangements (1980–2014). Furthermore, we probe the criterion and construct validity of our measure with respect to known determinants, proxies, and outcomes of ownership. We argue that ours is a reliable, replicable, valid, robust, and systematic measure of ownership that can help better identify and estimate the indirect relationship between program design and policy implementation.

Presidential prerogatives, exogenous situations, and Sisyphean IMF loan arrangements: examining fiscal crises in post-Arab Spring Tunisia and Egypt

Since the Arab Spring’s overthrow of leadership in Tunisia and Egypt in 2011, both states find themselves in severe fiscal crisis due to currency shortages, high external debt and inflation, despite loan arrangements from the International Monetary Fund (IMF). Why has a decade of IMF loan programmes been unable to offset these economic imbalances? This article assesses the financial situations in both state cases, outlines the processes and provisions of IMF loan programmes, looks to specific examples of application in post-Arab Spring Tunisia and Egypt, and then articulates whether domestic leadership, exogenous crises, or IMF conditionality arrangements best explain the inability of the IMF to address these fiscal issues. It concludes by placing most of the blame on conditionality of IMF loan programmes, which encourage austerity and increased debt rates, creating a ‘Sisyphean arrangement’ where both states remain continuously inclined to accept further loan programmes, without alternative for economic reform to offset debt. However, effects of domestic leadership actions and exogenous crises remain highly influential on the performance of state economies, illustrating that the IMF’s position as being able to solve most fiscal problems is inhibited by these factors as well.

INTERNATIONAL POLITICAL ECONOMY AND IMF: EXAMINING THE EFFECTS OF EXTENDED FUND FACILITY (EFF) ON THE GOVERNANCE STRUCTURE OF PAKISTAN

The International Monetary Fund (IMF) is a global financial organization that offers financial support to nations with economic difficulties. There are serious worries about the efficacy of IMF Program conditionality on debtor countries due to the IMF's growing influence through the Extended Fund Facility Program and their performances in developing countries. The conditionality of the International Monetary Fund (IMF) Program is examined in this research in relation to Pakistan's economic governance. Due to its long-term reliance on IMF resources, Pakistan presents an intriguing case study. The influence of IMF conditionality on Pakistan's economy's governance structure and key economic indicators is examined in this study using a broad framework of qualitative elements. The study's findings demonstrate that there is consistently uncertainty in the governance structure and the execution of policy decisions in IMF lending schemes. Due to this deterioration, the country was unable to meet its macroeconomic objectives, such as reducing poverty and controlling inflation, Future perspectives on the research findings recommend that Pakistan's economic policy makers concentrate on their other sources of economic strength rather than solely relying on the IMF Program.

The Political Economy of Chinese Debt and International Monetary Fund Conditionality

Abstract Developing and emerging market economies have increased their debt exposure to China in recent years. Despite its initial promise, many borrowers of Chinese loans face difficulties in meeting these loan obligations. Under what circumstances do Chinese borrowers in debt distress turn to the International Monetary Fund (IMF)? Our starting point is that Chinese loans are tied into projects that promise to generate sufficient revenue to repay these loans. We expect that governments turn to the IMF for bailout funding when a severe shock erodes the value of the underlying loan collateral, requiring mobilizing revenues and implementing austerity measures. Without alternative financing options, the IMF becomes the most viable option to weather financial distress. We expect governments to accept a ‘whatever-it-takes’ number of loan conditions. Using cross-country time-series analysis for up to 162 countries between 2000 and 2018, we show that defaults on Chinese debt trigger IMF programs only when a country experiences a severe adverse shock. Countries tapping the IMF also accept a greater number of loan conditions. From a policy perspective, current financial distress in borrowing countries underscores the urgency to design and deploy targeted governance reform measures beyond program safeguards and loan conditions to mitigate the built-up of macro-financial vulnerabilities, independent of where the money is coming from.

“Keep the Receipts:” The Political Economy of IMF Austerity During and After the Crisis Years of 2009 and 2020

Abstract In 2009, the International Monetary Fund (IMF) reformed its lending arrangements and conditionality. Thereafter, it has pursued “parsimony,” emphasizing headline fiscal adjustments rather than detailed budgetary changes. This paper analyzes the extent to which these reforms have resulted in changes to the overall austerity required by IMF agreements. We create a new variable measuring the level of fiscal consolidation required in each IMF program from 2001 through 2021 the IMF Fiscal Adjustment Indicator (IMF FAI). We explore whether IMF austerity eased after the financial crisis and the later COVID-19 pandemic. We also estimate the economic and political determinants that help explain varying levels of IMF austerity across IMF programs during this period. We find that IMF conditions were less austere for the years of 2009 and 2020, but quickly returned to their previous levels, echoing the IMF’s advice to “keep the receipts” during crises. However, these temporary relaxations were not statistically significant, pointing to overarching continuity. We find that countries that were granted relatively more lenient conditionality were found to be those with closer relations with major shareholders of the IMF: Western Europe and the United States. In contrast, countries with close diplomatic relations with China face higher IMF austerity.

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.

IMF Support Arrangement for Pakistan: (July 2019-September 2022)

Pakistan is a prolonged user of the International Monetary Fund (IMF) resources under medium-term support arrangements that began in 1982 to address recurring external economic problems and ensure economic stability through medium-term reforms. Initially, the ruling regimes in each of these times had reservations about certain IMF conditions, but they were ultimately compelled into having an arrangement by the harsh domestic realities as push factors and quick disbursement and concessional terms as pull factors. Borrowing from the IMF was considered more favorable than borrowing from the World Bank or other sources.

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.

The West’s Teeth: IMF conditionality during the Cold War

AbstractDid the International Monetary Fund (IMF) play a role in the United States and its Western allies efforts to contain the advance of communism during the Cold War? To answer this question, we construct a new database containing the number of conditions applied to over 500 IMF loans since 1970 and analyse how the distance from a borrowing country to its closet communist neighbour affected the IMF conditionality. We show that the Fund imposed fewer conditions on loans to countries geographically closer to the communist bloc. Results are stronger when neighbouring communist countries were not part of the Warsaw Pact. This pattern persisted during the 1990s, when the Fund helped former communist countries in their transition to market economies. However, we find no strong evidence of such discretionary treatment by the IMF after 2001, when the containment of communism had ceased to be the West's top priority.

Examining the effect of IMF conditionality on natural resource policy

AbstractCan 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.

Who Is Credible? Government Popularity and the Catalytic Effect of IMF Lending

In this paper, I explain variations in international investors’ reactions to International Monetary Fund (IMF) programs. Investors react favorably if a borrowing government is credibly committed to implementing essential IMF conditionality. Instead of engaging complex information processing about economic reform, however, investors rely on a heuristic device to assess the borrower’s domestic political conditions. I argue that a borrowing government’s popularity is an important cue for investors to assess the prospect of an IMF program. Investors associate higher government popularity with better implementation of the program and react more favorably to more popular borrowers. Using annual data from up to 52 emerging market economies from 1998 to 2017, I find robust statistical evidence supporting these claims: an IMF program alone does not restore investor confidence. Rather, an IMF program carried out by a strong government does. My findings have important implications for the study of global financial governance and credible commitment.

The determinants of IMF fiscal conditionality: Economics or politics?

AbstractConditionalities, measures that a borrowing country should adopt to obtain loans from the International Monetary Fund (IMF), are pervasive in IMF programs. Empirical work on the determinants of IMF conditionalities typically employs indicators based on the number of conditions as proxies for program austerity. This paper estimates the effects of political and economic factors on a different measure of stringency of conditionality: the fiscal balance requested in an agreement. The correlation between the number of conditions and the requested fiscal adjustment is close to zero in our sample. The requested adjustment is strongly linked to the country's fiscal deficit but is also affected by politics. For middle‐income and upper‐income countries, political alignment with the US has a significant negative effect on the fiscal effort required by the IMF.

Hide and seek: IMF intervention and the shadow economy

By explicating the mechanisms through which International Monetary Fund (IMF) programs operate, this study investigates the effect of IMF intervention on the shadow economy. Using a sample of 141 countries from 1991 to 2014, we examine the impact of both IMF participation and conditionality on the informal economy. Our analyses address sources of endogeneity related to, first, the IMF participation decision and, second, the conditions included within the program. The empirical findings suggest that both IMF program participation and conditionality increase the size of the shadow economy. Disaggregating IMF conditions into structural and quantitative shows that only structural conditions are significantly related to a larger shadow economy both in the short- and long-term. Financial development can reduce the size of the shadow economy, yet it cannot reverse the detrimental effect of IMF conditions. Our initial results are found to be robust across alternative empirical specifications.

Discretion on the frontlines of the implementation of the Ghana School Feeding Programme: Street‐Level Bureaucrats adapting to austerity in northern Ghana

AbstractGhana's economy faltered in 2012, culminating in the country requesting a bailout from the International Monetary Fund (IMF). Typical of IMF financial assistance, the approval of this bailout was hinged on the government agreeing to implement some conditionalities. In fulfilment of the IMF conditionalities, the government in 2015 adopted fiscal austerity. Using Michael Lipsky's Street‐Level Bureaucrat conceptual framework, this paper investigates the implications of Ghana's fiscal austerity programme for the implementation of the country's school feeding programme. Specifically, the paper examines the coping strategies adopted by the service providers to endure the challenges of delivering the programme within the climate of austerity. The findings highlight how financial challenges can lead to inadequate service delivery, as the service providers adopt a host of discretionary practices such as compromising the quality of meals served, the delivery of cheaper‐to‐prepare diets and an inconsistent service delivery regime.

The political economy of IMF conditionality and central bank independence

International organizations (IOs) often drive policy change in member countries. Given IOs' limited political leverage over a member country, previous research argues that IOs rely on a combination of hard pressures (i.e., conditionality) and soft pressures (i.e., socialization) to attain their political goals. Expanding this literature, we hypothesize that IOs can enhance their political leverage through loan conditions aimed at enhancing the political independence of key administrative units. Studying this mechanism in the context of the International Monetary Fund (IMF), we argue that through prescribing structural loan conditions on central banks (CBI conditionality), the IMF empowers central banks to gain more political leverage with the aim to limit a government's ability to (ab)use monetary policy for political gain. Divorcing monetary authorities from their respective government, the IMF intends to alter political dynamics towards achieving greater program compliance and enhance long-term macro-financial stability. Relying on a dataset including up to 124 countries between 1980 and 2012, we find that the IMF deploys CBI conditionality to countries with fewer checks and balances, a less independent central bank, and where the government relies more heavily on the monetization of public debt.

IMF = I’M Fired! IMF Program Participation, Political Systems, and Workers’ Rights

How do International Monetary Fund programs and conditions affect labor rights? Recognizing the diversity of International Monetary Fund conditionality, we argue that the more stringent International Monetary Fund labor market conditionality is, the worse labor rights become. However, this negative effect can be mitigated if there exist domestic political institutions that have incentives and abilities to provide protections over workers: one such case is a closed-list proportional representation system; another case is a leftist government that relies on political supports of workers. Our empirical analysis demonstrates that the more labor conditionality a program includes, the worse labor rights the country sustains. In addition, we report that the negative effect is partially mitigated when domestic political circumstances are favorable to the political representation of workers under a proportional representation system or under a leftist government.

Hide and Seek: IMF Intervention and the Shadow Economy: An Empirical Investigation

By explicating the mechanisms through which International Monetary Fund (IMF) programs operate, this study investigates the effect of IMF intervention on the shadow economy. Using a sample of 141 countries from 1991 to 2014, we examine the impact of both IMF participation and conditionality on the informal economy. Our analyses address sources of endogeneity related to, first, the IMF participation decision and, second, the conditions included within the program. The empirical findings suggest that both IMF program participation and conditionality increase the size of the shadow economy. Disaggregating IMF conditions into structural and quantitative shows that only structural conditions are significantly related to a larger shadow economy both in the short- and long-term. Financial development can reduce the size of the shadow economy, yet it cannot reverse the detrimental effect of IMF conditions. Our initial results are found to be robust across alternative empirical specifications.