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)| false Vaubel, Roland, 1991, “ The Political Economy of the International Monetary Fund,” in (Editors), Roland Vaubeland Thomas D. Willett The Political Economy of International Organizations: A Public Choice Perspective, ( Boulder, Colorado: Westview Press), pp. 200- 244.
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Wolfgang Mayer is the David Sinton Professor of Economics at the University of Cincinnati. Alex Mourmouras is a Senior Economist in the Policy Development and Review Department. The key ideas of this paper were presented at the 2001 IMF Research Conference. For helpful comments and suggestions we are indebted to Pat Conway, Jim Boughton, Tim Lane, Anna Ivanova and other conference participants. All errors are ours.
Dixit, Grossman and Helpman (1997) extended the classical theory of optimal taxation due to Ramsey by incorporating self-interested governments influenced by vested interests.
Hellman and Kaufmann (2001) and Åslund (2001) describe state capture and rent-seeking in transition countries. Oxford Analytica (1995) put this well in the African context: “Adjustment programmes have tended to run counter to preconceptions among the African intelligentsia and bureaucracies, who have favoured state control and African self- sufficiency. They also threatened sectional interests who gained advantage from subsidised foreign exchange and credit, a large parastatal sector and protection against imports.
Dalmazzo and de Blasio (2001) focus on the influence which rents from oil wealth exert on self-interested governments.
This is the typical formulation in the economics branch of the political economy literature. See Grossman and Helpman (1994 and 2001) and Dixit, Grossman and Helpman (1997). The political science branch also considers influence-buying by lobbyists achieved through information-dissemination and analysis.
While in reality the terms and conditions of Fund financing are determined following extensive negotiations with the authorities, we follow the common-agency approach of Bernheim and Whinston (1986) which assumes that the Fund makes take-it-or-leave it offers to the government.
Whereas this paper views the government as a unitary actor subject to pressure by private special interest groups, Drazen’s (2001) thoughtful paper develops a model of IFIs in which the government must contend with domestic veto players. These are constitutional and institutional actors that influence policy making from within government. The number and power of veto players depends on a country’s political and constitutional organization (see Tsebelis, 2001a-b). Both models provide useful insights on ownership and conditionality.
A truthful (or compensating) equilibrium is one in which agents’ contribution and assistance schedules accurately reflect their valuations of the principal’s actions. See Helpman and Grossman (1994, 2001) for more details.
Foreign assistance is assumed to directly benefit social welfare in the recipient country. We abstract from important problems which arise when governments are captured by special interests and intermediate foreign assistance in inefficient ways. This problem with foreign assistance is highlighted by Adam and O’Connell (1999) in a model in which the government uses its coercive powers to redistribute resources to its favorite groups.
Other assumptions can be entertained regarding the objectives of IFIs. “Hard core” public choice analyses of the IMF typically portray it as a budget maximizer (Vaubel, 1991, 1996). Our specification of the IFI’s objective follows recent public choice analyses of the Fund that view it as a pure public interest institution (Willett, 2000). See also Martin (2000).
Hence, the IFI’s opportunity cost of providing assistance to the recipient country is
Clearly, more assistance would be welfare-immizerizing if the effectiveness of assistance increased with the level of distortions: WωT > 0 implies dω 0/dT >0.
It is implicitly assumed that the government has no access to private international capital markets.
This can be seen from differentiating C(ω0, T) with respect to T, where ω0 depends on T, as expressed in (9).
If economic assistance were totally unrelated to distortions and the IFI showed no special preference for the assistance-receiving country, it would provide assistance such that
Note that one cannot assure that the solution is unique without imposing additional restrictions. The RR curve might be tangent to the same IFI welfare contour more than once. Nonetheless, all these equilibria under unconditional assistance will be associated with greater distortions and more assistance than equilibria in the presence of conditional assistance.
This means that the IFI provides more assistance in situations where assistance lowers distortions than when it does not lower distortions.
Dixit, Grossman, and Helpman (1997, pp. 758-9) discuss the properties of a principal’s payment function using a similar diagram. They summarize that “the shape of the payment schedule mirrors the shape of the principal’s indifference surface.”
In order to show that
These results can be more precisely derived from equations (14)) and (18).