International Monetary Fund. Finance Dept., International Monetary Fund. Strategy, Policy, &, Review Department, and International Monetary Fund. Statistics Dept.
This paper provides background for a further round of discussions on the Fifteenth General Review of Quotas (hereafter 15th Review). The paper builds on work presented in previous staff papers and Directors’ views expressed in three meetings of the Committee of the Whole in September 2017 and February 2018. No proposals are presented at this stage, pending further Board guidance on possible approaches to narrowing the current differences of views.
Financial crises are traditionally analyzed as purely economic phenomena. The political
economy of financial booms and busts remains both under-emphasized and limited to
isolated episodes. This paper examines the political economy of financial policy during
ten of the most infamous financial booms and busts since the 18th century, and presents
consistent evidence of pro-cyclical regulatory policies by governments. Financial booms,
and risk-taking during these episodes, were often amplified by political regulatory stimuli,
credit subsidies, and an increasing light-touch approach to financial supervision. The
regulatory backlash that ensues from financial crises can only be understood in the context
of the deep political ramifications of these crises. Post-crisis regulations do not always
survive the following boom. The interplay between politics and financial policy over these
cycles deserves further attention. History suggests that politics can be the undoing of
There is now widespread recognition that addressing quota and voice imbalances across the membership is essential for preserving the effectiveness of the Fund and its credibility as a cooperative institution. As noted in the Managing Director’s Report on Implementing the Medium-Term Strategy,2 members’ quotas have become increasingly out of line with countries’ economic weight in the global economy. In addition, the declining role of basic votes since the Fund was established has weakened the voice of smaller developing countries.
IMF lending is generally conditional on specified policies and outcomes. These conditions usually are negotiated compromises between policies initially favored by the Fund and by the country's authorities. In some cases the authorities might be satisfied enough with the outcome to take responsibility for it ("own" it) even though it was not their original preference. In other cases, they might accept the outcome only to obtain financing, in which case weak commitment might lead to poor implementation. This paper reviews the theoretical basis for the importance of ownership, summarizes what is known about its empirical effects, and suggests a strategy for strengthening it.