Only when a small country asks for concessional external credit, such as that provided by the IMF or by bilateral aid programs, is there a case for international discussion of that country’s stabilization plans. This is the key justification for “conditionality”; if you ask for a gift, you must listen to your patron.Carlos F. Diaz-Alejandro (1984).
American Enterprise Institute, 2000, Reforming Bank Capital Regulation: A Proposal by the U.S. Shadow Financial Regulatory Committee, (Washington: AEI Press).
Buchanan, James M., 1975, “The Samaritan’s Dilemma,” in Altruism, Morality and Economic Theory, ed. by Edmund S. Phelps, (New York: Sage Foundation).
Council on Foreign Relations, 1999, “The Future of the International Financial Architecture,” Foreign Affairs, (November/December), pp. 169-184.
De Gregorio, José, Barry Eichengreen, Takatoshi Ito, and Charles Wyplosz, 1999, An Independent and Accountable IMF, Geneva Reports on the World Economy, No. 1, (Geneva: International Center for Monetary and Banking Studies).
Drazen, Allan, and Stanley Fischer, 1997, “Conditionality and Selectivity in Lending by International Financial Institutions,” (unpublished, IMF).
Goldstein, Morris, 2000a, “Strengthening the International Financial Architecture: Where Do We Stand?” (Washington: Institute for International Economics).
Goldstein, Morris, 2000b, “IMF Structural Conditionality: How Much is Too Much?” (Washington: Institute for International Economics).
Haque, Nadeem Ul, and Mohsin S. Khan, 1998, “Do IMF-Supported Programs Work?: A Survey of the Cross-Country Empirical Evidence,” IMF Working Paper WP/98/169, (Washington: IMF).
James, Harold, 2001, The End of Globalization: Lessons from the Great Depression, (Cambridge, Massachusetts: Harvard University Press).
Kaplan, Steven N., and Per Stromberg, 2000, “Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts,” NBER Working Paper 7660, (Cambridge, Mass.: NBER).
Killick, Tony, 1997, “Principals, Agents and the Failings of Conditionality”, Journal of International Development, Vol. 9, pp. 483-495.
Kotowitz, Yehuda, 1987, “Moral Hazard”, The New Palgrave: A Dictionary of Economics, eds. John Eatwell, Murray Milgate, and Peter Newman, (New York: Norton Press).
Lindbeck, Assar, and Jorgen Weibull, 1988, “Altruism and Time Consistency: The Economics of Fait Accompli,” Journal of Political Economy, Vol. 96, No. 6, pp. 1165-82.
Mussa, Michael and Miguel Savastano, 1999, “The IMF Approach to Economic Stabilization,” IMF Working Paper, WP/99/104, (Washington: IMF).
Musso, Alberto, and Steven Phillips, 2001, “Comparing Projections and Outcomes of IMF-Supported Programs,” IMF Working Paper WP/01/45, (Washington: IMF).
Polak, Jacques J., 1991, “The Changing Nature of IMF Conditionality,” Essays in International Finance, No. 184 (Princeton, New Jersey: Princeton University).
Santaella, Julio, A., 1993, “Stabilization Programs and External Enforcement,” IMF Staff Papers, Vol. 40 (September), pp. 584-621.
Spraos, John, 1986, “IMF Conditionality: Ineffectual, Inefficient, Mistargeted,” Essays in International Finance, No. 166 (Princeton, New Jersey: Princeton University).
Tirole, Jean, 2001, “Financial Crises, Liquidity Provision and the International Monetary Financial System,” Paolo Baffi Lecture on Money and Finance, Bank of Italy.
World Bank, 1999, High Impact Adjustment Lending (HIAL): Initial Evaluation, Operations Evaluation Department, Report No. 19797 (Washington: World Bank).
The authors are grateful to Stanley Fischer, Morris Goldstein, Laurence Harris, Vijay Kelkar, Peter Montiel, Jean Tirole, and several IMF colleagues for helpful discussions, comments, and suggestions. The paper was presented at the South Asian Network of Economic Institutes (SANEI) Third Annual Conference, New Delhi, India, August 28-31, 2001.
For discussions of IMF conditionality, see for example, Williamson (1983), Polak (1991), Guitián (1995), and James (1996). The most recent description of IMF conditionality is provided in Boughton (2001), Chapter 13.
See IMF (2001a). This paper, along with other supporting papers, has been put on the IMF’s website to seek outside views. Also, seminars in various locations (Berlin, Tokyo, London) have been organized by the IMF in 2001 to generate wider discussion of the issue.
Compared to private lenders, the IMF faces a different selection problem, in that only members experiencing some distress approach the IMF for financing, and all have a right to IMF resources.
More formally, moral hazard can be defined as the actions of economic agents maximizing their own utility to the detriment of others in situations where they do not bear the full consequences of their actions due to uncertainty, asymmetric information, and incomplete or restricted contracts. See Kotowitz (1987).
Of course in a crisis situation, even if the country had internationally-acceptable collateral, it might still not be able to use it to borrow from private capital markets.
Additional safeguards are provided by the fact that IMF claims are de facto senior to claims of other creditors, and that disbursement of funds takes place in tranches, conditional on implementation of satisfactory policies (which are monitored) to correct the imbalances.
It is interesting to note that the Articles of Agreement of the IMF explicitly recognize this trade-off between collateral and conditionality (Article V, Section 4). A country can pledge collateral of “acceptable assets” in order to obtain waivers on certain conditions (i.e., borrowing in excess of IMF limits, or obtaining loans despite being ineligible to borrow).
See Anderson (1966). We are grateful to Harold James for bringing this information to our attention.
Strictly speaking, if all the policies are in line with the agreement, then disbursement would have to take place, irrespective of the results. The problem occurs when performance criteria are also placed on outcome variables—typically net international reserves—that are not under the authorities’ control. This issue is taken up in Section V.
Evaluations of programs will henceforth presumably also be conducted by the IMF’s newly-established Independent Evaluation Office.
For the biases that arise in the case of these two approaches, see the appendix in Haque and Khan (1998).
A low share of disbursements could also include cases where the program was so successful that the country only needed to use a small proportion of the available IMF funds. Also, the numbers include precautionary arrangements where there is a presumption that the country will not draw on the loan.
There is no direct empirical evidence on the link between ownership and IMF-supported programs. However, some evidence on the importance of ownership for project lending is provided by the experience of the World Bank. The World Bank’s Operations Evaluation Department (OED) assigns a rating to the government’s commitment for each project (measuring in a sense the degree of ownership) using a variety of objective and subjective indicators. The positive relationship between the project outcome and the government commitment turns out to be quite strong (and statistically significant).
Even for the case of countries facing a capital account crisis, Feldstein (1998) argues that the IMF may have been too intrusive in its interventions and should ask two questions of each conditionality measure: (i) Is it necessary for restoring access to international capital markets? (ii) Would the IMF ask the same measure of a major industrial country if it had a program?
Currently, the only IMF lending facility that requires pre-qualification is the Contingent Credit Lines (CCL) Facility. While it does not impose ex post conditionality, activation of the facility requires an approval of the country’s policy environment by the IMF.
There are many examples where rigid schedules have posed serious problems for countries. One concrete example involves the passage of laws. Legislatures in some cases have been surprised to find that the program has committed them not only to a specific legislative agenda, but also to a set of deadlines under which the relevant legislative actions have to be taken.
In principle, prior actions in IMF-supported programs can be thought of as a variant of floating tranche conditionality. A country agrees to undertake certain measures before the program (or program review) is discussed by the IMF Executive Board. The timing of the Board meeting and the disbursement of funds, therefore, depends on the prior actions having been taken. Reviews themselves may also be considered a form of floating tranche conditionality, since their completion (and the accompanying disbursements) depends on the agreed policy measures being taken.
Spraos (1986) also made a similar point but on the grounds that the links between outcomes and policy variables were too tenuous to allow policy-based conditionality to be particularly meaningful.
More generally, the creation of independent central banks, which the IMF has consistently advocated, would also suggest that monetary policy be judged in terms of inflation performance, rather than by variations in policy instruments. After all, that is the criterion by which independent central banks are judged.