Randall W. Stone

The Political Economy of IMF Lending in Africa

Why has IMF lending achieved such poor results in Africa? Is it because the Fund imposes the wrong conditions, or because it fails to enforce them? Analysis of monthly data on 53 African countries from 1990 to 2000 shows that the IMFs loans-for-reform contract lacks credibility because donor countries intervene to prevent rigorous enforcement. Countries that have influence with developed-country patrons—as measured by U.S. foreign aid, membership in postcolonial international institutions, and voting profiles in the UN—are subject to less rigorous enforcement (shorter program suspensions). They have more frequent program suspensions, because they violate their conditions more often. The IMF will have to become more independent in order to become an effective champion of reform.

The Scope of IMF Conditionality

International organizations are governed by two parallel sets of rules: formal rules, which embody consensual procedures, and informal rules, which allow exceptional access for powerful countries. A new data set drawn from the IMFs records of conditionality provides an opportunity to study the bargaining process within an important international organization and answer questions about the institutions autonomy. I find evidence of U.S. influence, which operates to constrain conditionality, but only in important countries that are vulnerable enough to be willing to draw on their influence with the United States. In ordinary countries under ordinary circumstances, broad authority is delegated to the IMF, which adjusts conditionality to accommodate local circumstances and domestic political opposition. The IMF has refrained from exploiting the vulnerability of particular countries to maximize the scope of conditionality.

Democracy and the Logic of Political Survival

Although democracy is a key concept in political science, debate continues over definitions and mechanisms. Bueno de Mesquita, Smith, Siverson, & Morrow (2003) make the important claim that most of democracys effects are in fact due to something conceptually simpler and empirically easier to measure than democracy: the size of the minimum winning coalition that selects the leader. The argument is intuitively appealing and supported by extensive data analysis. Unfortunately, the statistical technique they use induces omitted variable bias into their results. They argue that they need to control for democracy, but their estimation procedure is equivalent to omitting democracy from their analysis. When we reestimate their regressions controlling for democracy, most of their important findings do not survive.

Democracy and Multilateralism: The Case of Vote Buying in the UN General Assembly

Democracies are more supportive of US positions on important votes in the UN General Assembly than of nondemocracies. Is this because democracies share common perspectives, or does this pattern reflect coercion? Since 1985, US law has stipulated that the US State Department identify important votes and that aid disbursements reflect voting decisions. To unravel these alternative explanations, we introduce a strategic statistical model that allows us to estimate voting preferences, vulnerability to influence, and credibility of linkage, which are theoretical quantities of interest that are not directly observable. The results reject the hypothesis of shared democratic values: poor democracies have voting preferences that are more oppositional to US positions than autocracies, and they are more willing than autocracies to take symbolic stands that may cost them foreign aid. Democracies support US positions, however, because US aid linkages are more credible when directed toward democratic countries. Splitting the sample into Cold War and post�Cold War segments, we find that the end of the Cold War changed the way US linkage strategies treated allies and left- and right-leaning governments, but the effects of democracy remained constant.

The Use and Abuse of Game Theory in International Relations

The author argues that the theory of moves, which has gained popularity in recent years as an alternative to game-theoretic analysis of strategic interaction, is fundamentally flawed. The theorys adherents argue that it makes theoretical progress by endogenizing the structure of games and introducing new ways of analyzing repeated interactions. The author analyzes the theory of moves from a game-theoretic perspective and challenges its theoretical claims. The author then reanalyzes several recent articles that have used the theory of moves, showing that its application to empirical cases is strained and that game theory can provide models that do a better job of fitting the stories the authors tell about them.

International Organizations as Policy Advisors

How can international organizations persuade governments to adopt policy recommendations that are based on private information when their interests conflict? We develop a game-theoretic model of persuasion that applies regardless of regime type and does not rely on the existence of domestic constituency constraints. In the model, an international organization (IO) and a domestic expert have private information about a crisis, but their preferences diverge from those of the government, which must choose whether to delegate decision making to the expert. Persuasion can take place if the international institution is able to send a credible signal. We find that this can take place only if the preferences of the IO and the domestic expert diverge and the institution holds the more moderate policy position. This result contrasts with conventional wisdom, which holds that the necessary condition for IOs to exert influence is support from a domestic constituency with aligned preferences. Our model suggests that, far from being an obstacle to international cooperation, polarized domestic politics may be a necessary condition for IOs to exert effective influence.

Risk in International Politics

Representative governments under-invest in public goods that provide insurance against risk, The combination of inequality and risk aversion guarantees that the payoffs to insurance are skewed, so the median voter prefers a sub-optimally low level of investment. The problem is exacerbated by supermajority requirements or the need for international coordination. This accounts for some of the characteristic shortcomings of domestic public policy and represents an important obstacle to international cooperation. The argument is illustrated with reference to the Kyoto Protocol and the International Monetary Fund. The argument implies that delegation to international organizations with risk-averse preferences may be welfare enhancing.

Mixed Signals: IMF Lending and Capital Markets

The effect of new International Monetary Fund (IMF) lending announcements on capital markets depends on the lender’s political motivations. There are conditions under which lending reduces the risk of a deepening crisis and the risk premium demanded by market actors. Yet the political interests that make lenders willing to lend may weaken the credibility of commitments to reform, and the act of accepting an agreement reveals unfavorable information about the state of the borrower’s economy. The net ‘catalytic’ effect on the price of private borrowing depends on whether these effects dominate the beneficial effects of the liquidity the loan provides. Decomposing the contradictory effects of crisis lending provides an explanation for the discrepant empirical findings in the literature about market reactions. This study tests the implications of the theory by examining how sovereign bond yields are affected by IMF program announcements, loan size, the scope of conditions attached to loans and measures of the geopolitical interests of the United States, a key IMF principal.

Russia: The IMF, Private Finance, and External Constraints on a Fragile Polity

In the years since the collapse of the Soviet bloc, a vast new territory has become integrated into the world economy, international capital movements have threatened governments throughout Central Europe and Eurasia, and multilateral lending agencies have gained striking influence over economic policies. As of this writing, the International Monetary Fund has signed conditionality agreements with every country of the former Soviet Union and Eastern Europe except Bosnia, Serbia, Tadzhikistan, and Turkmenistan. Indeed, critics of unbridled capital markets and the ‘Washington Consensus’ that supports them — including Leslie Elliott Armijo, Mary Ann Haley, and Tony Porter in this volume — worry that international institutions and international investment may so constrain economic policies during the transition that weak democratic institutions are swept away by popular discontent. This chapter takes a different view. I argue that the policies urged by international financial institutions are in fact the ones best suited to consolidating democracy in post-Communist countries, because inflation has such disastrous consequences. Unfortunately, however, the multilateral lending agencies are not very effective at constraining Russia’s economic policies. Instead, the most binding constraint on government policies comes from international capital markets; but the lessons that they teach are often learned too late, and the compulsion that they exert comes on the heels of economic disaster.

Corporate Influence in World Bank Lending

The World Bank withholds loan disbursements in order to build a reputation for enforcing conditionality, and multinational firms lobby for these funds to be released. Using data drawn from World Bank reports, we find evidence that (1) participation by Fortune 500 multinational corporations as project contractors and (2) investments by these firms are associated with disbursements that are unjustified by project performance. In addition, these measures of corporate interest are associated with inflated project evaluations. These effects are limited to multinational corporations headquartered in the United States or Japan, suggesting that the influence of private actors depends on access to particular national policy networks. In contrast to the evidence of corporate influence, we find no consistent evidence of geopolitical influences.