The institutional failures of International Monetary Fund conditionality

Abstract

The conditionality employed by the International Monetary Fund (IMF) in its lending policy is one of the main themes of controversy in the debate on the new international financial architecture. The purpose of this paper is to propose an analytical framework integrating the diverse explanations of the failure of IMF conditionality. Our analysis is based on the idea that the IMF is a key player in the running of markets in a global economy. More precisely, we explain that most of the criticisms concerning conditionality should be analyzed through what we agree to call the institutional failures of IMF conditionality. These institutional failures must be appreciated at two complementary levels: the first level refers to the intrinsic bureaucratic bias of the IMF while the second deals with the inability of the IMF to manage the institutional change required for the development of market processes and hence to maintain the institutional order in recipient countries. Although the first level failures have been particularly well studied via the international public choice approach, those of the second are, at best, often reduced to a simple statement. However, analyzing both levels of institutional failure of the IMF together is not without implications for the way in which the reforms of conditionality are conceived. Indeed, by including an analysis of the second level of failures, i.e. those relating to the relationship between conditionality and domestic institutional change, the recommendation of ex-ante conditionality emanating from the public choice approach, which tackles the first level of failures, will be invalidated. Instead a new approach will be proposed that suggests the separation of the role of the IMF as financial backer from its role as adviser to countries confronted by the globalization process.

Success in slow motion: The Europeanization of Romanian child protection policy

“…Two stand out. First, the case underscores that external actors need long attention spans in order to help their domestic partners defend policy innovations opposed by domestic or international foes (Allegret and Dulbecco 2006). Effective outsiders often are the ones who combine some form of power to say "no" with the capacity to stay engaged over the longer term.…”

International Disputes of the IMF: A Review

“…However, the author analyzes it from different perspectives and mainly explains the failure of the IMF system from two angles to emphasize the failure of IMF conditions: Firstly, the inherent bureaucratic bias of the International Monetary Fund. Secondly, the inability of the International Monetary Fund to follow up the development of the management market process and adjust policies at any time [14].…”

IMF concern for reputation and conditional lending failure: Theory and empirics

“…Moreover, a large proportion of IMF programmes are not successfully completed, with non-completion being not an indicator of graduation from the Fund but rather one of future referrals (on "recidivism" see Bird et al, 2004). 2 What are the reasons adduced by the literature for conditional lending failure? They have generally been investigated looking at the characteristics of the borrowing countries, with more attention being recently devoted also to a country's political and institutional features.…”

“…We show that the desire to avoid a loss of reputation might lead the Fund to exhibit some laxity (relative to social optimum) in interrupting financial programmes when countries are not meeting conditionality. 8 In turn, when the threat of stopping lending is not credible, borrowing countries' governments may not have the right incentives to fully comply with 6 Self-interest in international financial institutions can take a variety of forms (see, for example, Allegret and Dulbecco, 2004). 7 See Boot and Thakor (1993), Repullo (2000), Khan and Santos (2001).…”