Poor Institutional Performance and Lack of Demand for the IMF

• In Event: Domestic Politics and the International Monetary Fund

Abstract

Since the Asian financial crisis, the International Monetary Fund (IMF) has seen its lending activities decline sharply, with states being much more reluctant to engage with the IMF. What explains the recent lack of state interest for IMF programs? Despite a large research program devoted to the IMF, current theories are poorly suited to explain over time trends in borrowing from the Fund. This article argues that lack of demand for IMF programs can be attributed to deterioration in the IMF's international standing. Specifically, poor performance by the IMF damages its reputation as an effective international organization, which makes IMF programs less appealing for potential borrowing states. Two mechanisms could drive this relationship. First, states themselves may downweigh the probability of a future IMF program being successful, which makes governments less willing to incur the short-term political costs of reform. Second, even states not doubting the competency of the IMF may still fear that borrowing from the Fund sends a negative signal to market actors. I test the argument using a cross-national sample spanning from 1980 to 2015. Using highly refined data on IMF program conditionality and state compliance, I construct a new indicator of IMF performance that measures the extent to which the IMF successfully achieves the ex ante policy objectives that it itself commits to within borrowing states. The statistical evidence suggests that poor IMF performance does deter future borrowing. To isolate the mechanism behind this relationship, I test an observable implication of the second mechanism: The negative effect of poor IMF performance should be strongest when ex ante information about the borrowing country’s economy is scarce and the signaling effect of IMF programs is consequently strong. The statistical evidence supports this claim, which suggests stimulating state interest in the Fund will not be as simple as relaxing IMF conditionality.

Author

• Brendan J. Connell, University of Colorado Boulder