Implementation uncertainty and the design of imf conditionality
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Implementation Uncertainty and the Design of IMF Conditionality. Martin S. Edwards Whitehead School of Diplomacy Seton Hall University. The Limits of Conditionality. 40% of International Monetary Fund lending programs are suspended for noncompliance

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Implementation Uncertainty and the Design of IMF Conditionality

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Implementation Uncertainty and the Design of IMF Conditionality

Martin S. Edwards

Whitehead School of Diplomacy

Seton Hall University


The Limits of Conditionality

  • 40% of International Monetary Fund lending programs are suspended for noncompliance

  • Program suspension has real costs for both IMF and the borrowing state

  • To what extent is the IMF to blame for the failings of conditionality?


Question

  • How does the IMF design loan programs if it does not know ex ante whether the borrowing state will honor its promises?


The Argument:

  • IMF devises conditionality both prospectively and retrospectively

    • Conditionality is front-loaded in states with approaching elections and federal states

    • Conditionality is front-loaded in states with a history of poor program implementation.


Does Implementation Uncertainty Matter for the IMF?

  • Joseph Stiglitz (2002:52): “Sometimes conditionality was even counterproductive, either because the policies were not well suited to the country or because the way they were imposed engendered hostility to the reform process.”

  • Stanley Fischer (1998): “We don't need to form very sophisticated judgments about the political forces in (those) countries. We basically have to form a judgment on whether the government will do what it says it will do in an overall satisfactory way.”


Forming international agreements

  • Variations in the form of international agreements are responses to uncertainty

    • Escape clauses / renegotiation are ways to adjust agreements

  • Agreements made under high transaction costs look different than those in which parties face low transaction costs

    • Ex ante commitments can be used to make promises more credible


Assumptions

  • Fund faces uncertainty about borrower commitment

  • Program causes domestic dislocation

  • Renegotiation costly for IMF

  • Renegotiation costly for borrower


If I’m right…..

  • Expect more conditions in states with a higher level of implementation uncertainty.

  • But these conditions should be imposed on states ex ante.

    • IMF imposes conditions (prior actions) in order for Executive Board to approve program


What shapes implementation uncertainty?

  • Approaching elections

    • We know that electoral cycles are common in developing countries, and that elections often coincide with program interruptions

  • Federalism

    • Economic adjustment more difficult in these states

  • Past performance

    • Failed programs lead to changes


Expectations

  • Prospective

    • Programs with approaching elections are more likely to have prior actions than those in which elections are not approaching

    • Federal states more likely to have prior actions

  • Retrospective

    • Programs negotiated in the wake of a suspended program are more likely to have prior actions than those negotiated following a successfully completed program.


Cases

  • Random Sample of 38 States under Programs from 3rd qtr 1997 to 2nd qtr 2003.

    • Asia (7 states), Latin America (8), Africa (11), Eastern Europe (12)

    • 183 agreements initiated in this time period

    • States required to submit new memoranda as part of program review process


Dependent Variable

  • Count of fiscal prior actions for each agreement

    • Range: 0-12

  • Prior actions are those policy measures that are prerequisites for review by Executive Board


Examples of Fiscal Prior Actions

  • Measures adopted to reduce wage bill

    • Cambodia 99q3: freeze on new hiring for civil service

  • Measures to increase revenue

    • Russia 99q3: Delay law on VAT reduction

    • Pakistan 01q1: Mandated increases in rates for electricity and gasoline

  • Measures to reduce expenditure

    • Armenia 98q4: Publish decree detailing govt plan to reduce expenditures by 7 billion dram.

  • Passage of Fund-compliant budget by legislature


Why Fiscal Prior Actions?

  • Have to look at prior actions to ascertain whether Fund incorporates implementation uncertainty

    • Looking at performance criteria makes causal chain unclear

  • Fiscal criteria serves as “most likely” case

    • Electoral cycles manifest themselves through higher levels of spending

    • Federal states esp. prone to fiscal problems

    • Noncompliance stems most frequently from fiscal shortfalls


Independent Variables

  • Policy Stance

    • Lagged budget deficit / GDP (-)

    • Lagged growth of expenditures / GDP (+)

    • Lagged growth of reserves (-)

    • Lagged GDP (-)

  • Type of Agreement

    • Dummy for PRGF/ESAF (+)

  • US influence

    • Lagged US foreign aid / GDP (-)


Independent Variables

  • Approaching elections (Dummy)

    • Is an executive election six months away?

  • Federalism (Dummy)

  • Status of past program (Dummy)

    • Did the Fund interrupt the program for noncompliance?


Research Design

  • Confront substantial missing data problems

    • Missingness on fiscal variables approaches 40% of sample

  • Used multiple imputation (King et al 2000) to address missing data


Research Design

  • Empirical Test is a negative binomial model

    • Appropriate because data are counts

    • Distribution of count dictates model specification

  • Population averaged to address panel heterogeneity


Substantive – Discrete Change


Robustness Checks

  • Results hold in the presence of the following

    • Controls for Quota in IMF

    • Controls for Democracy

    • Trade Openness

    • Changes in Exchange Rate level

  • Results unchanged with nine-month window.


Summary

  • IMF does not lend “in the dark”

    • Expectations about electoral horizons affect program design

    • Programs look differently in federal states

    • Expectations about program compliance affect program design


A Further Question to Consider

  • Do prior actions make a difference ex post?

    • In fiscal performance?

    • In the probability of program suspension?


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