IMF conditionality and the economic exposure of its shareholders
| Published date | 01 June 2014 |
| DOI | 10.1177/1354066112448257 |
| Date | 01 June 2014 |
| Author | Michael Breen |
European Journal of
International Relations
2014, Vol. 20(2) 416 –436
© The Author(s) 2012
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DOI: 10.1177/1354066112448257
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E
JR
I
IMF conditionality and the
economic exposure of its
shareholders
Michael Breen
Dublin City University, Ireland
Abstract
There is substantial evidence that International Monetary Fund policies are driven by the
powerful states which intervene to align policy with their preferences. In particular, many
have argued that the United States uses its position as the Fund’s largest shareholder to
achieve its foreign policy objectives. As a result, a substantial volume of literature argues
and presents evidence to support the claim that International Monetary Fund decisions
faithfully reflect US interests. My findings extend these claims. Using a new dataset on
the presence in International Monetary Fund agreements of binding conditions, which
cause the agreement to be suspended or terminated if they are not met, I demonstrate
that International Monetary Fund agreements contain fewer binding conditions when
a suspension of International Monetary Fund lending plausibly would impose greater
hardship on creditor country banks and exporters.
Keywords
conditionality, economic interdependence, global finance, IMF, intergovernmental
organization, political economy
Introduction
International organizations have come to play a prominent role in an increasingly interde-
pendent world. The International Monetary Fund (IMF), in particular, is one of the most
important international organizations in modern times. Only a handful of developing
countries have not participated in an IMF program, and this list grows smaller every year.
As a result, the extent of its involvement in the societies of developing countries is remark-
able. When taken together with the depth of its involvement in national policy-making,
via conditionality, its role is unique in contemporary international relations. Few
Corresponding author:
Michael Breen, School of Law and Government, Dublin City University, Ireland.
Email: Michael.breen@dcu.ie.
448257EJT20210.1177/1354066112448257European Journal of International RelationsBreen
Article
Breen 417
international organizations can claim to have such a broad reach while still retaining the
ability to make and enforce decisions that affect the core functions of sovereign states.
In return for an IMF loan, a country must agree to implement a list of policy conditions.
The Fund’s ability to set and enforce conditions has been a source of great controversy,
with criticism coming from across the political spectrum over whether it, or any other
international organization, should have the power to dictate economic policy to sovereign
states. Apart from the normative debate over international organizations and the use of
power, there is now a broad consensus that IMF policies are responsive to both political
and economic pressures, and are not merely technocratic outcomes. Accordingly, many
scholars argue that IMF policies are driven by the powerful states that oversee and guide
policy, intervening when necessary to align policy with their preferences (Copelovitch,
2010; Kang, 2007; Stone, 2004). In particular, many have stressed that the United States
uses its position as the Fund’s largest shareholder to achieve its foreign policy objectives.
As a result, a substantial volume of literature argues and presents evidence to support the
claim that IMF decisions faithfully reflect US interests (Andersen et al., 2006; Dreher and
Jensen, 2007; Kahler, 1990; Oatley and Yackee, 2004; Thacker, 1999).
Another common view is that the Fund’s member-states have, for the most part, del-
egated their power to its bureaucracy (Barnett and Finnemore, 2004; Chwieroth, 2010;
Dreher and Vaubel, 2004; Vaubel, 1996; Willett, 2002). Proponents of this view argue
that specific attributes of the bureaucracy give it a lot of independence from its political
masters. First, the bureaucracy has ‘agenda-setting’ power, which allows it to devise
policy independently before presenting it to the Executive Board for approval. Second,
the bureaucracy comprises some of the world’s most skilled economists, making the
organization a source of knowledge and expertise. Finally, some argue that staff are
largely insulated from most forms of lobbying and political pressure.
While advocates of the bureaucratic politics approach all agree that the Fund has
autonomy, they disagree over how the staff use this freedom. On the one hand, govern-
ments may have delegated autonomy to the Fund in the knowledge that it comprises
responsible technocrats who will act mostly in the public interest. On the other hand, the
Fund’s bureaucracy may have escaped their control, engaging in rent-seeking behaviour
and ‘mission creep’. As a result, those who focus on the internal drivers of IMF policy
differ on the nature of the organization and the forces that drive its behaviour.
Both arguments on the relative importance of states and international bureaucracies
structure and guide much of the research on the IMF and the wider study of international
organizations. Within each approach, however, researchers have identified the determi-
nants and consequences of a range of specific policy outcomes. In this article, I build on
previous studies by contributing a new argument on the determinants of conditionality
based on the IMF shareholders’ economic interests. My argument is that the organiza-
tion’s largest shareholders (the United States, United Kingdom, France, Germany and
Japan) cooperate to reduce conditionality when they are exposed to risk and loss in a
developing or emerging market. An IMF program with too many binding conditions
could create panic among creditors and investors; if a country fails to implement a bind-
ing condition it cannot continue to draw on IMF resources. In cases where the sharehold-
ers are exposed to a lot of risk, they will support fewer binding conditions and use their
influence at the IMF’s Executive Board to achieve this outcome.
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