International Financial Institutions and their effect of National Competition Policy

It has often been said that at the turn of the new millennium, one developmental paradigm

has stood triumphant over all models in the world stage, and the so-called Washington
Consensus was to be that paradigm. After the collapse of the Soviet Union in 1991, it appeared
that state planning was a dead relic of a bygone age and nothing would stop the agents of a new
economic order from making free market liberalism the uniform economic law of the land.
Francis Fukuyama said as much in his seminal 1989 article, The End of History,

The triumph of the West, of the Western idea, is evident first of all in the total
exhaustion of viable systematic alternatives to Western liberalism. In the past decade,
there have been unmistakable changes in the intellectual climate of the world's two
largest communist countries, and the beginnings of significant reform movements in
both. But this phenomenon extends beyond high politics and it can be seen also in the
ineluctable spread of consumerist Western culture in such diverse contexts as the
peasants' markets and color television sets now omnipresent throughout China, the
cooperative restaurants and clothing stores opened in the past year in Moscow, the
Beethoven piped into Japanese department stores, and the rock music enjoyed alike in
Prague, Rangoon, and Tehran.1

1 Fukuyama, F. (1989). The End of History, The National Interest, Summer 1989, last accessed
December 21, 2015, available at https://ps321.community.uaf.edu/files/2012/10/Fukuyama-End-ofhistory-article.pdf

No one entity has been more at the forefront of the advancement of such market oriented
policies as have the two Bretton Woods institutions, the International Monetary Fund and the
World Bank.
One Dollar, One Vote: Politicization of the IMF

One of the existing bodies of political-economy literature which deals with the IFIs is that
regarding the politicization of the IMF. Numerous studies have shown that the IMF is, in fact,
politicized at various levels, Strom Thackers work, The High Politics of IMF Lending, is one of
the most cited in the field, and details numerous factors which point toward significant IMF
politicization.2
In his study, Strom posits three points which suggest IMF politicization. Although the
IMF is in fact subscribed to what is termed the Doctrine of Economic Neutrality, the record of
the IMF lending to debtor states which constantly violate its conditionality agreements or else
have a very low rate of borrower compliance leads to Thacker looking into other factors as
opposed to a purely economic rationale which may determine eligibility for loans.
Strom Thackers The High Politics of IMF Lending deals with the notion of the IMF
being a politicized organization, particularly at the Executive Committee level. Citing the IMFs
Doctrine of Economic Neutrality, Thacker evidences three main points which argue for the IMF
as being a politicized organization. The first is that there is a very low compliance rate on
borrower conditionality agreements, which are a requirement for IMF loans, and yet these
countries are still able to secure succeeding loans from the IMF despite their non-compliance.

2 Thacker, S. (1999). The High Politics of IMF Lending. World Politics , 38-75

Thacker views this as proof that variables other than economic considerations are taken into
account when deciding whether or not to disburse IMF funds to borrower countries.3
Second, he mentions the fact that each countrys representative on the executive board is
nominated by his or her country, which is likely to put them in a position to approve policies
aligned with the interests of their home state. Although it is the staff and not the board that
proposes programs, the board must approve all proposed programs before they are implemented.
Also, he postulates that the familiarity of the staff with the boards preferences will prevent them
from creating proposals which are not likely to be approved.
Finally, he notes that the voting system in the IMF is determined by member
contributions, in which the United States has the lions share, amounting to 17.83 percent of the
total vote. He then mentions that IMF voting procedures require a majority of at least 85%, thus
giving the US an unofficial veto.4 Further, a study by Radkin and Strand cited by Momani states
that, although the number is not absolutely large, it is essential for building winning coalitions in
the IMF voting process, and their study estimates the US relative voting strength to actually be
at around 62.3%.5 It is speculated that other countries may accede to us decisions for fear that the
US may veto their own favored programs.
He proposes a decision making model regarding whether or not a country will receive
IMF loans, which states that, as a country moves its political position closer to that of the United
States, the more likely it is to receive loans. Countries already within the US political position
3 Id.
4 Id.
5 Momani, B. (2004). American politicization of the International Monetary Fund. Review of International Political
Economy , 880-904.

are not significantly affected otherwise. It takes into account numerous variables, such as per
capita income, level of US foreign direct investment, political proximity to the US, political
movement, balance of payments, outstanding debt, and the probability of default. His
econometric model operationalizes alignment position with the US on the basis of voting in the
United Nations General Assembly, and was able to correctly predict the outcome in 83.25% of
cases.6
Woods and Lombardis Uneven Patterns of Governance studied the means by which
developing nations seek representation within the IMFs 24-Member executive board, as the
existing system gives the top 5 states in terms of voting share (USA, Japan, France, Germany,
and the UK) an exclusive right to appoint their directors, while the remaining 19 members, who
individually possess a weak voting share, must seek alternative methods of representation in
order to get their interests heard. Their study found that, in the case of these weaker countries, it
was expedient for them to arrange themselves into large coalition groups or constituencies and
to then appoint a single director for representation at the board level, because their individual
votes shares were low enough as to be ignorable in deliberation of pertinent issues.7
These constituencies would then confer upon their director the ability to use all of their
collective voting power, hence providing a collective action mechanism for vote-poor countries
in the IMF vis-a-vis the wealthier ones. These strategies then encourage countries to expand their
coalition base in order to improve upon their position within the organization.

6 Thacker, S. (1999). The High Politics of IMF Lending. World Politics , 38-75
7 Wood and Domenico, N. a. (2006). Uneven Patterns of Governance: How Developing Countries Are Represented
in the IMF. Review of International Political Economy .

Bessma Momani discusses in her American politicization of the International Monetary

Fund how the decision-making in the International Monetary Fund is not only politicized at the
level of the Executive Board, as studies by Thacker and Oatley have suggested, but also at the
level of the technocratic staff which drafts policy recommendation. She employs a method of
analysis which involves declassified documents regarding the IMFs role in Egypt, and then she
analyzes them for what she terms as slippages in the policy recommendations. Essentially,
slippage occurs when the final plan presented to Executive Board after Article IV Consultations
with Egypt contained strict measures. Specifically, if the terms drafted by the Staff during
Article IV consultations are not included in the actual agreement, slippage is said to have
occurred.8
Momani chose Egypt as a Case Study for two reasons, mainly because of the United
States vested geopolitical interests in the region, and because of the strong bilateral aid ties
between the two countries. Four cases of IMF agreements were analyzed, this was done in order
for a pattern to emerge in the decision making procedures. Momani found that in two of the four
agreements studied, slippages were indeed present and the agreements were in fact, likely
politically determined. These were exemplified by the US facilitating the agreement, when
regular economic criteria would have in fact demanded more stringent terms from Egypt. The
politicized agreements in question were the 1987 and 1991 agreements, which Momani views as
US attempts to shield Egypt form difficult economic conditions and reward its participation in
the First Persian Gulf War.9

8 Momani, B. (2004). American politicization of the International Monetary Fund. Review of

International Political Economy , 880-904.
9 Id.

Thomas Oatley discusses in his American Interests and IMF Lending the politicization of
the IMF to be the result of the institutional structures governing IMF decision making creating an
opportunity for American policymakers to influence IMF lending decisions. He believes that the
considerable financial resources possessed by the IMF and its ability to create economic policies
for its member states make it able to exert more influence than any other organization in
history. He looked into the amount of loans the IMF extended to countries as a factor of their
outstanding indebtedness to US commercial banks. He then concludes that the political interests
do in fact reach into IMF processes at the decision-making level, the IMF executive board, which
corroborates what other studies had already stated.10
Further, he also concluded that American foreign policy interest also make it into the
policy formulation stage, meaning in the design of the Conditionality agreements. 11 His theory is
that the IMF lends to countries with significant commercial bank debt because the primary use of
the IMF loans will be to service debt owed to the commercial banks. In essence, the IMF is being
used by the American policy makers to transfer credits to their own commercial banks.
Having discussed the possible politicization of the IFIs, it is now pertinent to examine
what existing literature has to say regarding the effects of the IMF on the domestic politics of
various states.
Money Talks: How International Financial Institutions Affect Domestic Policy

Several studies have also show the significance of IMF activity on politics at the
domestic level. This was clearly given as an example by Robert Putnam in his The Logic of TwoLevel Games, wherein he cites John Hillmans The Mutual Influence of Italian Domestic Policies
10 Oatley, T. (2004). American Interests and IMF Lending. International Politics , 415-429.
11 Id.

and the IMF. That study in particular, while acknowledging the perception that the IMF imposes
certain conditionality agreements over its debtor nations, attempted to look into the effect of the
IMFs influence on domestic political outcomes. In the Italian case, certain difficult austerity
measure being demanded by the IMF from the Italian government were having difficulty being
ratified due to the existence of significant opposition from domestic interest groups.12
In an unusual circumstance, the IMF directly went to the groups and negotiated with
them, and then restructuring its demands to include long-term investment and recovery (without
altering any of its immediate, short term demands) thus paving the way for the continuation of
negotiations (the negotiations failed afterwards due to other circumstances). Hillman then
concludes that, oftentimes, rather than the IMF simply imposing its agenda on debtor countries,
domestic actors may actually take advantage of the IMFs presence in order to strengthen their
own domestic agenda.13
This is in agreement with James Vreelands study Why do Governments and the IMF
Enter into Agreements?, wherein he question why some countries which do not need IMF loans
do seek them, while some countries which do need IMF loans do not. Vreeland postulates that,
aside from the conventional wisdom which suggests that governments approach the IMF when
they are in need on loans or financing, governments may in fact be using the IMF to help further
their own domestic agendas. For certain governments, particular structural economic reforms are
exceedingly costly and politically unpopular to domestic constituencies, they may use the IMF

12 Putnam, R. (1988). Diplomacy and Domestic Politics: The Logic of Two-Level Games. International
Organizations , 427-460.

13 Id.

presence to help implement these particularly difficult policies.14 In other words, governments
enter into IMF conditionality agreements, with the expectation that certain specific conditions
will be stipulated.
Vreeland cites the case of Uruguay 1990, the country with the strongest level of cash
reserves and balance-of-payments ever to seek an IMF loan. Desperate to push for reforms to
curtail the budget deficit, the welfare state nature of Uruguay nevertheless made it practically
impossible for then-president Lacalle to mobilize support for it. Seeing the need for an
International ally, Lacalle actually filed a letter of intent to the IMF within two weeks of sitting
in office.15
The tighter policies Lacalle espoused (specifically the privatization of the State-owned
telecommunications monopoly) were able to pass through Uruguays legislature. However,
opposition was so strong that, no sooner had this happened, opponents were able to start a
motion for a referendum on the issue, which was then promptly voted down by a landslide 70%
margin. Vreeland concludes that the mere fact that Lacalle could pass a bill with 70% public
opposition through the legislature is a testament of the strength and utility of the IMFs
conditionality agreements for helping push for desired unpopular domestic policy agendas.16
In Irfan Nooruddin and Joel Simmons The Politics of Hard Choices, the discussion
centers on the role that IMF conditionality agreements play on domestic politics, particularly in
terms of the budget allotments for the social programs welfare of governments. With a focus on
14 Vreeland, J. (2003). Why Do Governments and the IMF Enter into Agreements? International
Political Science Review , 321-342
15 Id.
16 Id.

democratic regimes, the authors state that while IMF program may differ across countries, in
general they do share an emphasis on reducing the role played by the state in the economy.
Citing numerous studies, they illustrate that a significant number of IMF programs contain
provisions on reducing government expenditure and deficits. Governments aiming to do this
normally undertake it "by decreasing subsidies, public-enterprise deficits, public employment,
public-sector wages, and government expenditures on investment.17
The authors then point out that the content of all IMF programs are in fact the product of
arduous negotiations between the IMF and its prospective debtor countries, thus this means that
politicians in the borrowing country still retain, to a certain degree, some control over which
programs are to be implemented, what type of spending is to be cut, and what reforms are to be
enacted. Through an analysis of economic indicators from the World Bank of all countries for
whom data was available, Nooruddin and Simmons conclude that the evidence provides
significant support the critique that IMF conditionality programs often resulting reductions of
social spending in democracies, and that this is often because public sector interests groups are
less able to organize themselves politically in order to resist spending cuts.18
Further, with regards to the characteristics of the structural adjustment programs
commonly espoused by the IMF, there is a general consensus that for the period leading up to the
1990s, at the very least, economic liberalization has been a cornerstone of their macroeconomic
reform agenda. According to Dani Rodrik, in cases of debt recovery, IMF programs put an
emphasis on economic stabilization in the early stages of the process, primarily through the
17 Simmons, N. & Nooruddin, I. (2006). The Politics of Hard Choices: IMF Programs and Government Spending.
International Organization , 1001-1033.

18 Id.

means of fiscal restraint and currency devaluation. Once the desired degree of stabilization is
achieved, then the shift is made towards the true structural reform strategies, which include,
among others, trade and financial liberalization, privatization, and deregulation of both industry
and agriculture. As of the 1990s, Rodrik stated that this outline of strategies constituted the
accepted orthodoxy of that period, which had a pronounced focus on liberalization and marketoriented reform.19
In line with this, Collier et al., who looked into the experiences of African countries, have
also stated that the primary method by which the desired macroeconomic reforms are achieved
by the IMF is through conditionality arrangements. In particular, the receipt of both loans and aid
was made conditional to acceptance of policy reform provisions. Among the consequences of
this was the existence of a dominant donor presence in the countries which received financial
assistance, primarily representatives from the agencies in questions who set up office in order to
keep track of program compliance.20
As to the rationale for the conditionality provisions, Collier elaborates on five objectives
which are sought to be achieved via the introduction of conditionality. Firstly, as inducement for
recipient countries to change their policies (to induce governments to enact policies they would
not otherwise). Secondly, selectivity of aid to recipients who already possess the desired policies,
thereby encouraging the continued implementation of such policies. Third, a paternalistic
objective in which focuses on the improvement of the recipient (thereby restricting what funds
may be used for only to a certain category of spending, e.g. public school building). Fourth,
19 Rodrik, D. (1990). How Should Structural Adjustment Programs be Designed? World Development ,
933-934
20 Collier, P. et al. (1997). Redesigning Conditionality. World Development , 1399-1401.

conditionality is used as a means of lock-in, in order to have recipient countries honour their
previously made commitments, and provide a disincentive for reneging. Fifth, another objective
is signaling, whereby loans and aid are used as expressions of confidence in the recipient, in
order for others (and in particular, private agents) to follow suit.21
In particular, Gore states that the general idea of the Washington Consensus was
actually best advanced through the activity of the International Financial Institutions (IFIs) in the
form of the Structural Adjustment Programs espoused by organizations such as the IMF and the
World Bank.22 Although the term Washington Consensus actually refers to ten policy
prescriptions first articulated by Williamson as being widely shared in Washington (headquarters
of the IMF and WB), the term in general refers to a variety of policies which serve to promote I)
macroeconomic stability and deficit reduction, 2) trade and capital account liberalization, and 3)
liberalization of domestic markets through privatization and deregulation. In general, however,
the ideas of the Washington Consensus have only been in vogue so to speak, since the 1980s,
where it found most of its thrust through the activities of IFIs. Providing a short timeline of
development thinking, the 1950s and 60s saw controversies between the ideas of balanced and
unbalanced growth, while in the 1970s some pointed out the inadequacy of focusing on structural
issues when there were important social objectives that needed addressing.23
Buira in turn notes that, while conditionality is often considered the most controversial
aspect of IMF programs, there has been a noticeable increase in the number of conditionality
21 Id.
22 Gore, C. (2000). The Rise and Fall of the Washington Consensus as a Paradigm for Developing
Countries. World Development , 789-804
23 Id.

arrangements observed during the decade of the 1990s. Indeed, he notes that the progression
conditionality agreements into progressively more complex arrangements, and to illustrate this,
he showed that the average number of conditions in an IMF agreement during the 1970s was
around 6 conditionality provisions. In the 1980s, this average figure rose to ten, while in the case
of the World Bank, the average number rose from 32 in the 1980s to around 56 in the 1990s.24
Further, he states that the amount of conditionality in IMF agreements reached its peak
during the Asian Financial Crisis of 1997. During this time, the number of provisions reached
quite large numbers when compared to the 70s; with Thailand having 73 provisions, South Korea
having 94, and Indonesia 140.25
Competition Policy and the International Financial Institutions

24 Buira, A. (2003, February 13). An Analysis of IMF Conditionality. Retrieved May 16, 2012, from G24 Website:
Paradigm for Developing Countries

25 Id.