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The Political Economy of IMF Voting Power

The Political Economy of IMF Voting Power. J. Lawrence Broz, UCSD and Brock Blomberg, Claremont. Research Question. Why does the IMF’s political system tie voting power to the size of financial contributions (quotas)? The system looks like this…. Our Approach.

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The Political Economy of IMF Voting Power

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  1. The Political Economy of IMF Voting Power J. Lawrence Broz, UCSD and Brock Blomberg, Claremont

  2. Research Question • Why does the IMF’s political system tie voting power to the size of financial contributions (quotas)? • The system looks like this…

  3. Our Approach • As with any political system, IMF members have opposing interests over policies - a clash that translates into opposing interests over the system • The basic conflict is between rich country “creditors” and poor country “borrowers”

  4. Use of IMF Resources* *Includes outstanding use of credits within the GRA, SAF, PRGF and Trust Fund

  5. Distributional Conflict • We develop a model that hinges on the division of members into “rich” and “poor” countries • We model the IMF as political system that engages in redistribution between rich and poor

  6. Model • Two types of economies: Rich r and Poor p. • Economic pie is divided across world with fraction of income  held by the rich and (1- )held by the poor. • Since

  7. Transfers T from rich to poor are accomplished through taxes  • Taxes  are imposed on domestic economies with some convex cost C(.) • Cost function is conditioned on the ideology of the domestic government: with

  8. Indirect utility for country i is • Political powerX is a weighted index of “autonomous power”  and “voting power” , which depends proportionally on  (as in the IMF) • So, for the rich

  9. Main Results • When taxation influences voting power (IMF) and the poor have substantial autonomous power, 1/2, then  is positive (rich transfer income to poor). Hence, it’s necessary for political power to depend on quotas for the rich to have the impetus to support transfers • As power moves from the rich to the poor, then increasing inequality implies more transfers from rich to poor. • The magnitude of the effect of inequality depends critically on the type of domestic government (conservatives reduce )

  10. Empirical Hypotheses • Countries with greater shares of GDP are more likely to request more voting power (higher quotas), provided the poor have sufficient political power • We also predict that these effects are smaller for right-wing governments

  11. Data and Design DV = actual quota, country/year obs sampled during “General Reviews”  = deviation in income share relative to the mean R = dummy for right-wing govts R *  = interaction for conditional effect Qc = economic controls from IMF quota formulas (contains Y, R, P, C and VC)

  12. Table 1: Political Quota Equation

  13. Conclusions • We derive a rationale for the IMF’s political system in which: • The IMF redistributes income from rich to poor • The poor have “autonomous” political power at the IMF • The rich require voting power if they want to remain influential

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