Politics of IMF lending: who borrows from the IMF and why? Why countries borrow from the IMF

• Pages: 121-125

Page 121

At a March 28 IMF Institute seminar, a trio of political economists attempted to "make sense of IMF lending." They made a case for looking beyond old-style economics, which ignores political factors, in favor of new-style economics, which incorporates all of politics into a single variable.

This new approach, they said, can provide a more nuanced economic picture because it focuses on the conflicts of interest that are inherent in the political environment. Factoring politics into economic decisions also has implications for both the IMF and the countries that borrow from it, as Jeffrey Frieden (Harvard), James Vreeland (Yale), and Erica Gould (University of Virginia) highlighted in their presentations.

Why do countries that have or could conceivably have access to external financing turn to the IMF for a loan? Why is there an IMF? It has been said that if the IMF did not exist, it would be necessary to invent it. Jeffrey Frieden reiterated that view, dipping into history to describe the international creditor committees that have existed since the development of modernPage 123 sovereign lending 150 or so years ago. Their IMF-like function was to deal with the difficult cross-border and jurisdictional property right issues that accompanied sovereign lending. For example, the Ottoman Public Debt Administration was set up in 1881 and functioned for about 50 years: in its heyday, it controlled about one-fourth of the revenue of the Ottoman Empire. Between the two World Wars, creditor committees coexisted with the League of Nations and eventually led to the Bank for International Settlements, established to deal with German reparations and debt payments. In the absence of an international bankruptcy court, those institutions, Frieden said, like the IMF today, monitored and supervised debtor country policy and conditional lending.

Debtor-country scenario

Like their historical counterparts, modern debtor countries are often unable to pull themselves out of debt, partly because of conflicts within governments about what changes need to be made. Jeffrey Frieden presented a debtor-country scenario to illustrate a conflict between the desirability of access to external credit and the desirability of policy change. Suppose, he said, a country has three special interest groups.

One interest group strongly favors gaining access to credit and adopting economic reforms. Another group strongly opposes reform but is indifferent to access to credit. A group in the middle wants access to credit but is ambivalent to, or opposes, reform. This third, pivotal group functions as a "veto player" and must...