Autor: Veronika Štěpková

 

The first section concentrates on domestic interest groups and their influence on the acceptance of the IMF and the WB conditionalities. The second section focuses on other determinants of the policies adoption. Conclusion of this essay weighs the relative importance of the above-analyzed factors determining the adoption of the IMF and the WB economic policies.

 

Domestic Interest Groups and adoption of the IMF and the WB conditionalities

Both the IMF and the WB require from their borrowers agreements with conditionalities that often reduce political and economic power of domestic interest groups. Both the WB and to a greater extent the IMF conditionalities restrict the national sovereignty, state-client relationships and interest groups’ decisive power. Therefore domestic interest groups often appear not to have any direct interest in the IMF and the WB intervention. Still, these groups stimulate the process of economic policy adoption in both direct and indirect way.

Domestic “veto groups” including labour unions, retirees and public sector workers often constrain adoption of trade liberalization, privatization and others. An executive trying to push these reforms might then apply for a loan and use the IMF as a “scapegoat” of domestic reluctance towards economic reforms. (Veerland, 2003a). The attached conditionalities then become the main reasons for the IMF loan adoption.  For example, aligning with a strong foreign organization helped the Turkish Prime Minister Ecevit to succeed despite a strong public sector and labour union opposition in internalization of austerity measures including public sector cuts. The adopted reforms turned out to be unsuccessful in many important aspects; however, the initiation of the IMF loan came from the executive’s attempt to bypass domestic opposition. (Yeldan, 1999). Similarly, Brazilian president Cardoso achieved adoption of previously strongly opposed economic reforms only with the IMF assistance (Goldstein, 2003). If a loan is already agreed the political costs of disagreement with reforms often become too high for interest groups as the cost of noncompliance would include not only money supply loss but also strong negative signal to investors, donors and organizations. High level of mobilization against unpopular economic policies support the tendency of a leading executive to accept the IMF loans and to use foreign conditionalities to push adoption of unpopular measures such as import tariff cuts, deregulation and privatization of public industries and reorganization of social security system.

While participation of “veto groups” might motivate an executive to apply for an IMF loan, it might also reduce the IMF willingness to accept the contract.  The Fund’s reluctance derives from the expectation that domestic interest groups diminish the efficiency of reforms implementation (Remmer, 1986; Drazen, 2002). During the democratic era in Nigeria, domestic interest groups prevented implementation of the IMF conditionalities. Contrastingly, subsequent dictatorship regime succeeded in the pursuit of reforms. Participation of “veto groups” often presents a double edge sword as it motivates the countries’ leadership to turn to the IMF but it might also motivate the IMF’s loan refusal (Putnam, 1988).

The IMF’s function is often to provide a stable financial base which is necessary for the WB long-term loans accompanied by structural adjustment programs. The adoption of structural adjustment policies of both institutions is often motivated by issues connected with economic slowdown caused by interest groups. The oligarchic rent-seeking and influential business structure presented one of the main reasons for the Philippines’ economic stagnation which subsequently required the WB assistance. In Ghana, the lobby of state enterprises characterized by low efficiency and overemployment constrained economic development and this situation eventually provided a stimulus for the Ghanaian president to accept the WB structural adjustment policies. Adoption of the WB policies might have been motivated by the same logic of an executive necessitating foreign support to implement policies against domestic interest group involvement as in many IMF’s cases. However, as the WB deals with more long-term development problems than the IMF, the logic of interest groups motivating policies adoption is here often much more direct. It is basically quite common that these groups contribute to economic slowdown which in turn requires new economic reforms.  However, this argument remains explanatory just to a limited extent as domestic groups cannot be blamed entirely for countries’ economic problems.

Other explanations for adoption of IMF and WB policies

Vreeland (2003b) claims that slippage from the IMF and the WB conditionalities has its rootcause in the domestic political arena and countries’ reasons for policies adoption. Gruber (2000) on the other hand contends that the adoption of the IMF and the WB loans and conditionalities is a result of power politics where dominant states impose their preferences and set rules on the global economic scene. Subsequently, for developing countries it appears more strategic to comply with these rules and accept loans and conditionalities. This section examines the main international and domestic stimuli for international economic policies adoption and finally weighs relative importance of each factor.

 

Domestic political factors

Milner (2005) identifies democratic regime as the major push factor of international economic policies adoption. Contrastingly, Veerland (2003a) finds no correlation between democracy and the application of the IMF and the WB economic policies. Democratization in developing countries often appears more as a consequence of economic crisis which also leads to adoption of the WB and the IMF intervention. (Kaufman, Haggard, 1989). In addition, democracies tend to have more interest groups which might have mixed effect on the WB and the IMF policies adoption which was described in the first section. It is then more the specific political characteristics that determine the IMF and the WB policy adoption then the regime type.

Not only the “veto groups” but also an inconvenient institutional design and political opposition might play its role in economic policy adoption. The motivation for a reform-minded executive to apply for the IMF or the WB loan might also present a disapproval of parliament, a coalitional partner or a negative result of a national referendum. As the application process for a loan can often bypass opposition, the IMF and the WB conditionalities serve as a useful tool to adopt unpopular policies (Vreeland, 2007). In Kenya, the institution of a marketing board exercising important political power over agricultural export-related issues presented the main obstacle for greater openness but also an important push factor for acceptance of the World Bank conditionalities. While the marketing board was bypassed during the initiation of the WB loan, it then became the major obstacle for reform implementation in the 1980s. In Uruguay, Lacalle had to overcome not only the reluctance of interest groups but also the traditional welfare state and the national referendum which strongly opposed privatization and public sector wages cuts. Institutional resistance might substantially influence the IMF and the WB intervention.

Another factor leading to acceptance of international conditionalities is lack of legitimacy. Haggard and Kaufmann (1989) claim that unstable regimes tend to seek economic growth as a tool for finding political support. This is the case of new Asian democracies in the 1980s where executives hoped to establish with the support from the IMF and the WB loans and economic reforms. The economic profitability as a cornerstone of government’s legitimacy might present a motive for cooperation with the Bretton Woods Institutions.

 

Domestic economy

The previous arguments were based on countries entering the IMF and the WB programmes paradoxically mostly because of attached conditionalities. This section examines the insufficiencies of domestic economy as factors directly affecting country’s decisions for loan and economic conditionality adoption.

This assumption was questioned by Przeworski (2000) who claimed that given the strictness of the IMF conditionalities, neither an overall balance of payment or current account deficit appears to present sufficient reasons for the IMF loan acceptance as there are other possible lenders available for developing countries. According to Conway (1994) there is even no correlation between the level of debt and probability of the IMF intervention. Different evidence stating correlation between indebtedness and the IMF loan adoption was found by Santaella who also claimed that the interest rates on the international capital market prevent countries from borrowing from majority of foreign lenders (Santaella, 1996). Indebtedness as a determinant of an acceptance of the IMF intervention remains highly disputed in academia. According to the World Bank Development indicators (2011), countries that pursued the IMF economic reforms have a certain tendency for negative balance of payment. Still, these statistics remain explanatory just to a limited extent as they do not show the details of budget components stimulating the need for an intervention. However, it appears that there is a relative consensus about the lack of foreign reserves as a motivation to lending from the IMF for countries striving to maintain their basic imports. The causality was described by Vreeland (2003b), Knight and Santaella (1997) and it was admitted even in the IMF Staff papers (Drazen, 2002). Despite Przezowski’s claim, it appears that there are significant domestic economic reasons for the IMF loan and policy adoption.

Another factor possibly explaining adoption of the WB and the IMF was identified by Vreeland as recidivism. Vreeland states that insufficiency of the intervention of Bretton Woods institutions stimulates demand for further loan and economic conditionality adoption. This argument has been criticized by the IMF leadership for not explaining in depth the relatedness of adoption of the IMF conditionalities and economic slowdown. (Hacche, 2007). Economic dependency on foreign economic intervention described often as “the IMF or the WB course” (Easterly, 2006) appears as a plausible explanation due to the rising number of countries repeatedly asking for loans. Still, it remains often unexplained if the IMF loan or the original politico-economic problems recidivism in the adoption of the IMF and the WB loans and economic policies.

 

 

International political economy

 The IMF and the WB economic intervention is not only stimulated by the domestic demand but must be also approved by the institutions themselves. As Gruber (2005) notes, both these Bretton Woods institutions are important actors in global power politics whose decision might determine countries’ position in the international realm.

Changes in the ideological and historical context might substantially affect countries’ interaction with the IMF and the WB borrowers. Both institutions became highly influential in Africa in the 1980s as a consequence of economic slowdown originating in the appreciation of the USD, volatility of commodity prices and previous oil price rises (Woods, 2006) and expansion of neoliberalism. In Africa, the function of the IMF and the WB went often further than economic policy formulation as foreign donors based financial support on their reports (Woods, 2006). Similarly, their influence rose during the debt crisis in Latin America in 1980s (Pop-Eleches, 2009).  Conduct of both institutions reflects a wider international context.

The IMF’s and the WB’s positions might be also restrained by will of their major shareholders whose preferences could affect borrowing countries’ bargaining position. This can be exemplified by Korea where the USA insisted on extremely profound economic and institutional reforms as a necessary condition of the IMF loan adoption (Blustein, 2001). While the adoption of economic policies might be in certain exceptional cases complicated due to shareholders’ interest, the borrowers are aware of its positives for their position in the global economy.

Countries’ adoption of the IMF and the WB conditionality functions as a powerful signal for foreign investors. Probably one of the most visible functions of the IMF and the WB loans is its improvement of country’s credibility for foreign investors as a commitment to economic reform. The effect of openness might have however different impact according to investment type as market-seeking investors prefer greater tariff barriers. This effect was visible on many Sub-Saharan countries pursuing the IMF or the WB economic policies in the 1980s (Asiedu, 2002). Simultaneously, Gastanaga and Nugent (1998) state that the risk of the IMF and the WB loan adoption is that noncompliance with economic conditionality might present an important loss of FDI. The international economic environment plays an important role in countries’ decision-making about the IMF and the WB economic intervention.

 

Conclusion

This essay was designed to determine the relative importance of domestic interest groups in the IMF and the WB economic policies as a part of loan conditionalities. The above analysis has inevitably sacrified depth and detail due to the limited amount of examined factors and due to the omission of many ideological and sociological aspects. Still, it appears from the above analysis that the domestic interest groups itself would not achieve adoption of the IMF and the WB economic policies. The decision must be supported by domestic political and economic factors including the institutional design allowing interest groups to press government on economic issues. Simultaneously, the need to adopt international economic policies must be at least partly stimulated by insufficiencies of domestic economy, most probably lack of foreign reserves. The domestic determinants must be then coplemented by convenient international politico-economic conditions in order to achieve the IMF and the WB policies adoption.

While the domestic interest groups play its role in the process, the explanation of the WB and the IMF policies adoption lies in multiplicity of factors determining the adoption of international economic policies. For the future policy formulation the domestic interest groups and other above described factors should not be omitted as these might significantly shape bargaining of the IMF with its borrowers. Simultaneously, the IMF should also count with all these factors while designing suitable policies for each state. The theme of international economic reform adoption points out the interconnectedness of domestic and international political and economic realms.

 

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Websites:

  • The World Bank Development Indicators, 2011, The World Bank. [online] Available at: <data.worldbank.org/data-catalog > [Accessed 1 March 2011 ].

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